1995 ANNUAL REPORT,
PROVINCIAL AUDITOR
MINISTRY OF FINANCE
CONTENTS
Thursday 14 December 1995
1995 annual report, Provincial Auditor: Ministry of Finance
Dr Jack Mintz, faculty of management, University of Toronto
Dr Anthony Doob, Centre of Criminology, University of Toronto
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Chair / Président: McGuinty, Dalton (Ottawa South / -Sud L)
Vice-Chair / Vice-Président: Colle, Mike (Oakwood L)
Agostino, Dominic (Hamilton East / -Est L)
*Beaubien, Marcel (Lambton PC)
Boushy, Dave (Sarnia PC)
Carr, Gary (Oakville South / -Sud PC)
*Colle, Mike (Oakwood L)
*Crozier, Bruce (Essex South L)
*Fox, Gary (Prince Edward-Lennox-South Hastings / Prince Edward-Lennox-Hastings-Sud PC)
Gilchrist, Steve (Scarborough East / -Est PC)
*Hastings, John (Etobicoke-Rexdale PC)
Martel, Shelley (Sudbury East / -Est ND)
McGuinty, Dalton (Ottawa South / -Sud L)
Pouliot, Gilles (Lake Nipigon / Lac-Nipigon ND)
*Skarica, Toni (Wentworth North / -Nord PC)
*Vankoughnet, Bill (Frontenac-Addington PC)
*In attendance / présents
Also taking part / Autres participants et participantes:
Erik Peters, Provincial Auditor
James McCarter, executive director, ministry and agency audits
Clerk / Greffier: Decker, Todd
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 1008 in room 228.
1995 ANNUAL REPORT, PROVINCIAL AUDITOR
MINISTRY OF FINANCE
The Vice-Chair (Mr Mike Colle): If I can bring the standing committee on public accounts to order. Our Chairman, by the way, is snowed in in Ottawa somewhere.
JACK MINTZ
The Vice-Chair: We have with us, from the University of Toronto, Professor Jack Mintz. Thank you very much for coming here today, Professor, and I would invite you to begin your presentation.
Dr Jack Mintz: I first of all want to thank you for your invitation to speak before your committee on the retail sales tax gap. I almost feel this presentation is doomed. Last week I appeared here to find out that the day was still Wednesday instead of Thursday in the Legislature as a result of last week's fun and games, and today I've appeared and I wasn't even sure we would be meeting, given the weather conditions. I want to thank you, actually, for your efforts in coming out as well. That's very good public service.
Let me first begin by saying a few words. As I told the clerk, I would not have enough time to prepare a written presentation, but I did prepare a few comments that I would like to say and then I'll be very happy to answer any questions you would like to raise. I have also prepared a table that I've passed out which is entitled Effective Retail Sales Tax Rates, and I'll talk about this later on, but you should have that table.
To begin with, let me just say a couple of opening words about what's meant by "retail sales tax gap." In fact, in some ways I really don't like concepts like tax gaps, tax expenditures, and the reason I don't like them is that they often convey the idea that taxes belong to the government and not to the people, in the sense that the government is entitled to have the revenues. In fact, sometimes one can argue that evasion could be good, because it's a good way of trying to lighten the tax load and reduce distortions in the economy.
I am sympathetic with the idea of thinking about what it is that's currently happening in terms of retail sales tax collections in Ontario, and for that we would like to have a better concept of what is actually happening in terms of why retail sales taxes just don't seem to be as buoyant in the 1990s as they have been in earlier years.
In terms of talking about the retail sales tax gap, I think it would be useful to distinguish between what I think are two important issues: One is evasion and the other is avoidance. I like to think of evasion as illegal attempts at avoiding a tax. In other words, someone has a legal responsibility to collect the tax and fails to uphold the law. To me that is evasion, and that is a concern one has when it comes to taxation, because if there is serious evasion of taxes in a system, it undermines the whole voluntary compliance of the tax system which governments rely on in the western world.
With respect to avoidance, I think of avoidance as behaviour by taxpayers to avoid a tax but in a legal way. In other words, they are not circumscribing the law, but they are doing really what everybody does, and that is to try to avoid a tax when it's much higher than, let's say, other opportunities which are available to that person.
For example, if there's a very high tax rate on wine relative to beer and a person decides to drink more beer relative to wine in order to avoid that high tax on wine, then to me that's avoidance and it's perfectly legal. In fact, we economists think that's just behaviour where people try to substitute away from high-tax items to low-tax items.
To me, with the retail sales tax gap that was identified in the Auditor General's report, the important issue is evasion, not so much avoidance. However, from a policy perspective, one has to worry about both evasion and avoidance, and I'll raise that point later on at the end of my discussion.
In terms of the low takeup of the RST -- and in the table that I've provided to you I provide numbers with the Ontario sales tax revenues since 1985 -- you can see that revenues increased, from 1985 to 1989, from $5 billion to $8.5 billion. Then, after that point, revenues actually started to decline and it wasn't until 1994-95 that there actually have been more revenues raised in 1994 and 1995 compared to 1989-90.
However, we have to remember there are two things that happened during this period. First of all, the retail sales tax rate was increased from 7% to 8% in 1988-89, so that automatically would allow for more revenues to be raised. Secondly, one has to recall that in the period around 1992-93 we had expanded the retail sales tax to include the taxation of insurance premiums, and that resulted in higher tax revenues being realized as well, which shows up in the last two years of the numbers.
This does suggest that retail sales taxes have been pretty flat, and in fact falling, in the 1990s. The question is, why has that happened? There are usually two arguments that might be given: first, that there's been a recession, as we all know, starting in the 1990 period and consumption and retail sales had fallen as a result of that recession, and we know that would lead to less retail sales tax being collected; on the other hand, there's a strong feeling that a second reason for the retail sales tax to decline was increased tax evasion that occurred during the 1990 period, 1991 especially, when the goods and services tax was brought in.
There are one or two published papers in the Canadian Tax Journal, one of them by Peter Spiro of the Ontario government, who has provided evidence that retail sales tax collections did decline during the 1991 period, which he would attribute, taking into account other economic factors, that much of that decline was due to the inception of the GST, his hypothesis being due to increased tax evasion.
That's the reason, I think, that the Provincial Auditor of Ontario, quite rightly, thinks about the problems involved with auditing the retail sales tax and whether governments should try to improve -- whether the government of Ontario specifically should try to improve its collection of the retail sales tax.
When you do look at these numbers, I think one gets a better feeling of whether there is a sales tax gap by looking at the third and fourth columns of these tables. What I've done here is I've taken retail sales taxes and expressed them as a percentage of retail sales -- that's in the third column -- and in the fourth column I've expressed retail sales taxes as a percentage of Ontario consumption. These two numbers were taken from data. The first set of data are simply retail sales that are reported in Ontario. This tends to be a much smaller number than consumption, and there are two major reasons for that.
First of all consumption, when measured by governments for national account purposes, will include all sorts of expenditures by individuals, such as on non-durables, housing, as well as expenditures they might make outside the province or outside the country. It will also include, probably, a number of services that would not get captured by the retail sales tax figures.
In the third column you can see that the retail sales tax as a percentage of retail sales is greater than 8%. For example, in 1994-95 it's 11.9%. The reason for that is that a lot of retail sales taxes apply not only at the consumption level, when consumers buy goods and services, but also at the business level, because retail sales taxes fall on business inputs.
In fact, roughly one third of retail sales taxes in Ontario fall on business inputs, and that affects the competitiveness of businesses in Ontario relative to the international economy and also creates certain distortions that are important with respect to how production decisions are made by Ontario producers in Ontario, because those business inputs that are more highly taxed will try to be avoided by businesses and they will try to use those inputs that are less highly taxed. Of course, it might create some competitive disadvantages of one business relative to another if one business has to rely more on business inputs compared to another business.
As you can see from column 3, there was a very significant decline in the retail sales tax rate as a percentage of retail sales, going from 1990-91 to 1991-92. It fell from 11.3% to 9%. It would be very difficult to explain that without probably thinking of tax evasion as being the major contributor to that number.
When you look at the fourth column -- this is retail sales tax as a percentage of Ontario consumption -- you see that there are a lot of goods and services that are not captured by the retail sales tax in Ontario. When you measure it as a percentage of total consumption it's actually much, much smaller than the retail sales tax rate of 8%. In fact, it falls roughly between 4.5% to 5% of Ontario consumption. Again with these numbers, you can see there was a significant decline in the retail sales tax collections as a percentage of consumption in Ontario. From 1989-90 it fell from 5.5% to 5%, and from 1990-91 to 1991-92 it fell from 5% to 4.5%.
There are a number of reasons that will affect that -- things like cross-border shopping with the United States, substitution away from taxed goods to other goods -- that would lead to some of this decline. But probably most of it would again be roughly understood as lagging revenues likely due to tax evasion. So I think these effective retail sales tax rates tell a big story compared to just looking at the aggregate numbers, because once you start looking at taxes as a percentage of consumption, one gets a better idea of what have been the trends.
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These are some of the numbers that are quite useful, and now the question I want to raise is, what are the appropriate strategies for governments to deal with this?
The auditor's report quite properly goes into administrative practices, and that is one strategy in which a government could try to improve its retail sales tax collections and the fairness attached to it. More auditing, of course, can be successful in increasing revenues, and there are various tricks that governments can use to try to audit better the retail sales tax collections, but to a large extent we have to remember that additional auditing will require more administrative resources for the Ontario government.
There is a second strategy, and I like to think of this strategy as probably more appropriate in this case; that is, a change in policy. Because while one may want to concentrate on changes in administrative practice, to a large extent when a system is not working well it's much better to start thinking of changes in policy.
One change that could be adopted, and this has been adopted in many, many countries throughout the world, is to shift away from the retail sales tax -- in some other countries it's been maybe taxes on manufacturers, but to shift away from the retail sales taxes, with the very high taxes on business inputs, to a province-wide value added tax. The advantage of a province-wide value added tax is that when one business sells to another business -- both registered under the system -- the purchaser can claim an input tax credit for any taxes on business purchases and use that as a credit against any taxes that it collects on consumers. So one converts from a retail sales tax to a system that's much closer to a tax on consumption rather than business inputs.
It also has the advantage of perhaps taxing services to a larger extent, and a VAT for that reason has been very popularly adopted in many countries as a way of trying to achieve a better system where consumption goods are taxed at similar rates across different goods and services, as well as relieving taxes on business inputs. In fact, there are a number of federal countries where you find state-run or provincial-run VAT systems. For example, in Brazil the VAT, in fact the best-functioning VAT, is at the state level. One will also find in India discussions now about moving to a VAT at the state level as well.
This of course is one particular policy which Ontario could go on its own. There is a second policy which I think makes a lot more sense from the point of view of administrative savings for the Ontario government, and that's to harmonize the sales tax in Ontario with the federal GST and save for both levels of government significant administrative costs as well as achieving the important attributes of a VAT, particularly with respect to the taxation of business inputs.
I think this policy would be one that would be much wiser for the Ontario government to pursue. It would be wiser in the sense that there could be significant administrative costs associated with it, and at this time of deficit reduction and the need to curtail government expenditures it makes a lot more sense to move in this direction than simply to expand the expense associated with auditing.
My message to you as a committee and to those who deal with policy is that harmonization is probably the route for Ontario to follow and I would strongly advocate that this is the way to go.
Mr Bruce Crozier (Essex South): Thank you, Professor. I too am pleased that we've finally gotten together.
Just a couple of things: When you mention that a strategy would be to shift away from retail sales tax to a province-wide value added tax, I wonder if you could comment, in view of the fact that the GST, introduced federally, seems to be so hated. How do you think we could convince the buying public that they shouldn't evade these kinds of taxes and that it would be better from a public relations standpoint?
Dr Mintz: First of all, when the GST was brought in in 1991, the timing of it I think was quite inappropriate. It was brought in at a time when the economy was already going into a recession and there was significant taxpayer resistance to any new tax, which certainly the GST was, as it was replacing the manufacturers' sales tax.
In the case of Ontario, we already have a retail sales tax at the retail level so consumers are certainly well aware of it, and they've also now been dealing with the GST for several years, which has been the system now put into place.
One could conceivably bring in a joint Ontario-federal VAT system which, first of all, under provincial powers, legal powers of property rights under the Constitution, would allow the tax to be hidden in the price as opposed to being expressed separately, which is a point of irritation for consumers because you buy a good and you see the price and then you run to the retailer and you have to tack on another 15%, which is an irritation. So that's one thing that could be done that I think would help dispel some of the aggravation with the VAT.
The other point that could be very useful is that the VAT could be levied at a lower rate, at a combined lower rate, with some of the revenues made up with another type of tax. This of course might improve the acceptance of any joint system. On the other hand, right now at a 15% rate there would be a little bit of revenue that the Ontario government could pick up under a joint sales tax of 15%, and that of course could help fund any deficits that are faced by the Ontario government.
Mr Crozier: As you are probably aware, Professor, the finance ministers of the provinces have been meeting with the federal government over the last couple of days and, quite frankly, I didn't get a chance to read the newspaper reports this morning, but I can see at least by the headlines that this is meeting with some resistance. In particular, we're interested here in Ontario that Mr Eves, our representative, has indicated that it would cost the taxpayers $3 billion more, I think, although I suspect that there's some way of putting the two together that would be -- a political term we always like -- revenue-neutral. But there seems to be that resistance by the provinces right now. Are you familiar with that, and would you care to comment on that, please?
Dr Mintz: I just want to make sure I bring up one point before I forget. Let me first of all say that my understanding is that the Atlantic provinces are willing to go into an agreement on a joint federal-provincial sales tax and run it basically as a regional tax in the Atlantic provinces, which I think makes an awful lot of sense for them. They really don't want to pay for the heavy administrative costs of running their own retail sales taxes. This could be a very significant benefit to the Atlantic provinces in reducing some of the costs associated with it.
With respect to Ontario, Manitoba, Saskatchewan and BC, I know negotiations are taking place, and whether they will be successful or not will largely depend on the political will of individuals to deal with that.
I think the most significant issue is the one that the Minister of Finance in Ontario has raised, and that is the $3-billion question of whether consumers will pay $3 billion more in taxes. The problem I have with that argument is that we have to remember that, really, businesses don't pay taxes. It's people who pay taxes in some way or form. There may be a tax on a business such as retail sales taxes on business inputs, but either it has to get shifted forward in terms of higher prices to consumers or it has to get shifted back into lower wages paid to workers or lower returns paid on capital. Something has to happen with that tax. It just can't be swallowed by business, and that's because business is just a piece of paper, really, as a legal entity. It's people who actually pay taxes, all forms of taxes, in society.
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Of course, the incidence issue is very important. In my view, in work that we've done on looking at how taxes are shifted forward in open economies like Ontario, maybe half of retail sales taxes on business inputs are ultimately shifted forward on to consumers and the other half back on to producers. This is based on some work that I've done recently in a study on environmental practices with respect to waste management.
The interesting thing about that kind of number is that it does tell you that consumers will pick up some of the tab, there's no question, with a VAT. The consumers are also producers. People work in society. If businesses in Ontario could be made much more competitive by having a reduction of $1.5 billion in their taxes on business inputs, that could be very important in terms of jobs and other things that I think people in Ontario are looking forward to, and that is a very significant opportunity to have more wealth generation in this province.
I think it's very important at this point for Ontario to really think of moving in this direction, because on top of all these particular changes I've raised, there's also the significant administrative benefits of moving to a joint federal-provincial VAT system.
Mr Toni Skarica (Wentworth North): One problem I'm having with your suggestion is that when you bury taxes, there's no incentive on governments to ever reduce them. For example, gas taxes: When you pay gas 50 cents per litre, I think almost 80% of that is taxes, but you don't know it until you go to some place like the United States and you pay half for a litre of gasoline of what you pay here.
My problem with your suggestion is that at least now I hated the GST when it came in. I myself did not buy anything for about three months because I just hated it so much. But at least I know it's there. When I buy something now I still pay that 15% and still hate it, and then there's an incentive to reduce it, but if you bury it you don't see it and then there's no incentive on governments to ever reduce taxes. I just want your comment on that.
Dr Mintz: First of all, I agree with you that by burying it you take away some of the political visibility associated with the tax. Certainly that's the argument for having it quoted separately. The reason I suggested burying it isn't a bad idea is that most of the polls and studies that have been done about the views people have had towards the GST, and the retail sales tax too, although there's reasons it's had to be quoted separately, is that people have been aggravated just trying to deal with transactions where you see a price at the counter and then when you take it to the vendor at the cash machine they have that price changed on them and they're not sure whether they have enough cash or whatever. So that's been a significant complaint.
One of the things that could be done to at least maintain the political visibility, which is unlike the gasoline tax, is that it's still important on the invoice to quote separately the VAT rate. If you don't, it's going to be harder for businesses to calculate the actual input tax credit they get under the VAT system. So I would sort of take a position somewhere in the middle: You include it in the price but then still on the invoices indicate separately the tax. That will still maintain some political visibility, but even for administrative practices there will be an important benefit to people who have to comply with the system.
Mr John Hastings (Etobicoke-Rexdale): Professor, could you elaborate on or recommend at what rate you would see the province setting a value added tax? Is it close to the Brazilian rate, or would it be the same 8% as the existing retail sales tax?
Dr Mintz: At a 15% tax rate right now, my understanding is that Ontario would pick up a little bit of revenue associated with a joint sales tax. In other words, by expanding the tax to include all goods and services, which is a larger net under the value added tax, the additional taxes one collects are a little bit more -- by a few million dollars I understand -- than the taxes on business inputs that would be lost as a result of moving to a combined federal-provincial VAT system.
Then the question just becomes, what rate do you want to move to away from 15%? If you want to move to 12%, for example, and if the federal government reduced its rates a little bit and the province reduced its rates a little bit, which was one proposal at one time, and then the federal government was suggesting a flat income tax to make up for revenues, then certainly that will mean lot lower collections at both levels of government. To me, it's very much just a negotiation point, and I don't have strong views since I would sure like to leave that to the politicians to decide.
Mr Hastings: Do you think the value added tax rate should be the same as the existing --
Dr Mintz: The 15% rate?
Mr Hastings: -- 8% Ontario sales tax?
Dr Mintz: Yes. I think you could keep it at 8, but if you want to lower it to 7 you could, but you'll have to make up some revenue with it at a 7% rate.
Mr Hastings: What is your research with respect to the so-called significant administrative cost savings regarding an integrated or harmonized retail sales tax and GST? Do you have specific stuff you could leave with us?
Dr Mintz: No, I'm sorry, I don't have. Those are numbers that I've seen in studies in the past. The point is that we've seen this under personal income taxes, where we've had joint collection at the federal and provincial levels of personal income taxes. It does significantly allow for reductions in compliance cost for the private sector because they only have one form to fill out instead of two forms. It also leads to significant savings in administrative costs for governments, because you don't have two administrative bureaucracies trying to deal with the tax rather than just one.
There are a couple of studies that have been done on this, including by the Canadian Federation of Independent Business which has done work in the past. Yesterday, the Canadian Institute of Chartered Accountants released a study, and they've done some estimates of their own. There's a very good study done by François Vaillancourt for the Canadian Tax Foundation in a book called The Administrative and Compliance Costs of the Personal Income Tax and Payroll Tax System in Canada in 1986. So one could get at least a feel for potential administrative savings.
Mr Hastings: One final query: When the province raised the retail sales tax some years ago to 8%, does your analysis or research indicate how much leakage of revenue occurred as a result of that 1% rise from 7% to 8%, whenever it was, 1988 or 1989 -- maybe it was earlier?
Dr Mintz: No, I haven't tried to do that.
Mr Hastings: Do you generally think that there is significant leakage when a government raises its RST by one full per cent?
Dr Mintz: I'm not sure if 1% would lead to significant leakage per se. I have not tried to calculate that number. A study that was done on the changes in 1990-91, Peter Spiro's study in the Canadian Tax Journal, looked at a goods and services tax that went from essentially zero to 7%, which was a very large change. With the kind of work that he did, he suggested that there certainly was significant leakage at that time when it came in.
One of the things that happens, I think, is the psychology of all these tax changes, that when you have a very big change like that, people then all of a sudden start accepting the idea of evading a tax, which they didn't before. One of the lessons that people found in the literature on tax evasion is that you have asymmetric responses, that if you raise taxes considerably you may encourage a lot of evasion that didn't occur previous to that time, but if you lower the tax rate back to the original level later on, it doesn't have the same impact on tax evasion. In other words, people, once they get used to the idea of evading taxes, stay working at it.
I've always taken the view that significant changes in tax rates can lead to more evasion and if you try to reduce them later on, unfortunately, the psychology of it is that you're not going to get as much gain as you would like to get by reducing evasion. We even saw that with the cigarette taxes recently.
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Mr Marcel Beaubien (Lambton): Professor, with regard to the charts you provided us, if we look at the years 1991-92 and 1993-94, the retail sales tax as a percentage of retail sales in 1991-92 was 9%. If we compare it to the line in the next column, it was the equivalent of 4.5% of Ontario consumption. If we look at the year 1992-93, it's 10.6% and its relationship is 4.3% and then in 1993-94, it's 11.2% and as the percentage of Ontario consumption it's 4.6%. But if we take that line and bring it up to 1988-89, where it's 11.1% and 5.4%, why is that aberration there? Is there a shift in the tax?
Dr Mintz: No, actually it wasn't so much the shift in the tax. For some reason, 1992-93 retail sales were very low in that year, while the consumption numbers actually increased.
Mr Beaubien: The final question that I would have is that you mentioned about strategies; one was more auditing and then you gave us a change in policy, a shift from RST to a provincial-wide VAT, and then the harmonization.
In your opinion, which is the least favourable or the least interesting, I guess, of those four?
Dr Mintz: Of those three or four?
Mr Beaubien: More auditing I would consider as another strategy, and then on the second strategies you had A, B, C.
Dr Mintz: Okay. I state VAT and harmonization, so I have an A and B. I'm just wondering what the C was.
Mr Beaubien: Okay. Well, out of the three, then; all right.
Dr Mintz: If I was ranking, I would clearly put harmonization at the top. Running a provincial-wide VAT has certain advantages over the RST, even with more administrative work under the RST, in that you deal with the business input issue for taxation purposes and the competitiveness issue better and you have a more even rate of tax on different goods and services at the consumption level, so it's therefore a little less distortive.
The one negative thing about VAT, which I didn't mention earlier on, but certainly I always talk about it when talking about the gains and losses associated with different taxes, is that the VAT does have a lot more paperwork because you're having more businesses as part of the net. That's one advantage of the retail sales tax over the VAT system, that under a VAT every business, except for maybe the very small ones, will be collecting and remitting taxes to the government, while under the retail sales tax, it's mainly businesses at the final stage that will be doing that.
That's one advantage of the retail sales tax over the VAT system that I see, but I think I would tend more and more to the view that perhaps, from the point of view of international competitiveness and job creation, Ontario should seriously think about moving to a VAT system.
Mr Bill Vankoughnet (Frontenac-Addington): Earlier you mentioned about the tax going from -- well, a new tax -- 0% to 7%, but I just want to caution that actually it was really a replacement tax. It was the old manufacturing tax versus a new tax, a value added tax, and it was replacing something anywhere between probably 13% and 30% in some cases. I think it's important we keep that in mind, that even though it was a new tax, it was revenue-neutral, so to speak; again, a term that's used.
Now I'm wondering really with the attitude of the people out there, if we can really sell in the minds of the public, whether we should be talking harmonization. We talked about that earlier, in the early 1990s when this was brought in to try and harmonize it. But even if you hide it, such as many countries do in Europe, Italy being one, where they put it up front on the price and then your sales slip does show it, as you say, but nevertheless there's a mindset with the people that they hate paying this tax when they buy something. They're going to see it one way or the other.
Is there not a system that we could put in place, whether it be an income tax system or whatever, that we wouldn't need such a variety or such a number of different taxes? Could we not lessen the amount of taxes we pay, the different types of tax, at the local level, whether it be property taxes or business taxes or whatever? Could we not harmonize some of these taxes all across the board, whether they be federal, provincial, municipal, to make the system less complicated, easier to comply with and not have as many people necessary to administer it? Is there not something we could do in that line?
Dr Mintz: Let me just make one point about the manufacturers' sales tax. Yes, I'm quite conscious that the GST did replace the manufacturers' sales tax. We have to remember, though, that the manufacturers' sales tax was hidden, while the GST was there for people to see more carefully. Also, at least in the short run, when the economy was in a recession, the ability of businesses to pass on savings from the manufacturers' sales tax was less during that recessionary period when the tax came in.
In fact, a lot of the work that was done initially assumed that the manufacturers' sales tax was fully shifted forward on to consumers and that the prices would go down fully by the manufacturers' sales tax, and the GST, which was revenue-neutral, would simply just add on and the total effective tax rate wouldn't change.
That assumption that was used in these calculations was grossly incorrect, because the manufacturers' sales tax was also a tax on business inputs, and one of the lessons we know from economic theory is that when you have a tax that falls on business inputs, and potentially on exports, it doesn't get shifted forward to consumers. In an open economy it tends to get shifted back on to producers.
So when one actually looks at the total impact in 1991 when the GST came in, the effect of the GST was to perhaps raise the level of taxes to the order of at least 2% according to some calculations, like the Institute of Policy Analysis at the University of Toronto, close to two percentage points at that time once you take into better account what the impact of the manufacturers' sales tax would be on prices.
Of course, in terms of visibility, people looked at it as a major tax change, not just two percentage points going up, because they didn't see, necessarily, all the prices going down. In fact, the prices that were to go down were mainly durable expenditures like automobiles and refrigerators that people don't go out every day and buy. They're big in terms of our total consumption, but for everybody their usual daily consumption are things like services and haircuts and that sort of thing, and all they saw was 7% tacked on right away. So those are some of the problems that one has to deal with even in the current context of moving from a retail sales tax.
I do agree with you about the mindset, and of course there has been some discussion about flat taxes and an expenditure tax at the income level. You can have a direct personal tax where you tax the earnings of an individual and then let a person deduct their savings from the base. In a lot of my writings I've been a very strong advocate of expenditure taxation as a very reasonable way of dealing with what I think are a number of equity issues and efficiency issues involved with taxation policy, as well as simplicity.
Now, how successful is a flat tax going to be? The problem in relying on only one single tax base, like an income base or expenditure base, is that you load all the taxes on to that one base, and if there's any evasion that's going to go on, it's much easier to evade just one tax than to try to evade many multiple taxes at the same time. That's one argument, really, for trying to have different levels of taxes. It makes sure that, let's say, if someone's evading their income tax, at least they're going to get hit by a consumption tax when they go out and spend the money, or if they own a house they'll get hit at least by the property tax.
I think it's kind of pie in the sky that we're going to put all taxes into one single regime, but I do agree that there's a need for simplification and perhaps one of the ways of going about that is looking carefully at the income tax and what we're doing with it.
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Mr Skarica: If I could just take you to this chart, Effective Retail Sales Tax Rates, there seems to be a change in the relationship between the RST as a percentage of retail sales and the RST as a percentage of Ontario consumption.
If you go to the right-hand column, you'll see that for those first four years that you have on the chart you double it. You basically get the RST, the same figure, 4.7%, for example, in 1985-86. You double that; you get 9.4%. It's 4.8% in the next column; double that and you get 9.6%. But over the years, I see in the 1990s that relationship changes and in the 1992 through 1995 years, if you take, say, 1992-93: 4.3%; double that and you get 8.6%. That's a two-point difference between that and 10.6%. That continues on through the rest of the 1990s. That's a change in the relationship of about 20% to 25%. That's a significant change. Can you tell us why that's happening, or do you have any information as to why that's changing?
Dr Mintz: I'm not quite sure. I think your question's a good one, but I can speculate on one important aspect, and that is, the taxation of business inputs to the extent that retail sales tax falls more on business inputs and it's not getting captured by retail sales as much, as a base. So the effective rate is going up, in a sense, relative to the consumption rate, if you had the proper consumption measure; for example, insurance taxation. A lot of insurance is bought by businesses, not just by individual consumers, and that really increased to a significant degree the level of tax on businesses, and that would show up starting around 1992-93.
Mr Skarica: So your speculation then is that it is a reflection of increased taxation on businesses?
Dr Mintz: Perhaps, but I have to admit I haven't really studied the numbers. In fact, I spent some time talking to someone in the Ministry of Finance yesterday just on these retail sales numbers, because I didn't really quite understand them myself very well in terms of what they're actually capturing. It seems to be that they're capturing a much narrower base compared to what's measured as consumption in international accounts.
The Vice-Chair: Any further questions? Thank you very much, Professor. It certainly has been very helpful in dealing with a very hot topic, as you know, with the finance ministers in Ottawa. Some of the areas we're dealing with are certainly very much on everybody's minds. So maybe this will help us in giving forth some new points on what some of the recommendations should be to deal with this problem of evasion and avoidance. Thanks very much for coming.
Dr Mintz: You're welcome, and thank you.
Mr Crozier: Mr Chair, just before the professor leaves, I'm sure research has this down, but you mentioned the CFIB and the Canadian Institute of Chartered Accountants, and I think someone else who may have some reports that would be valuable to us and perhaps we could ask research to get so you've got those things.
The Vice-Chair: Excuse me, Professor. Mr Peters would just like to make a comment or ask a question.
Mr Erik Peters: Professor Mintz, I'm interested in the comment that you would rank harmonization with the federal GST as the first among the strategies that you're suggesting. We are running actually quite a relatively efficient collection system in terms of administrative effort per revenue dollar collected. Do you have any statistics on how well the GST is doing in this regard?
Dr Mintz: Those numbers have been reported in various studies. As I mentioned earlier on, it's well known that the difficulty with the VAT system -- and its biggest cost is that every business is really a part of the net, and so the compliance costs become larger as a percentage of revenue is collected under VAT, which I think is a negative in terms of, let's say, Ontario switching from a retail sales tax to just a province-wide value added tax without harmonization with the federal government. The gains in administrative costs I think would only be on the harmonization side, if there was a harmonization, because then you can have one bureaucracy instead of two and that's bound to have some administrative savings in that way.
Mr Peters: The point I'm concerned about is there was recently a hearing before the finance committee, or some such committee, that deals with this at the federal level, and they were indicating that the combined gap -- I understand you don't like that word very much, but I find it is very effective shorthand between what people feel should be collected and what is actually collected -- that that gap for income tax and GST combined -- and I didn't get a breakdown of it -- is in the $5 billion per annum range for Canada.
One of the reasons cited was that the GST is relatively difficult to administer because of the GST credits that go in, the much more depth that has to go in. The second point that is being made is that it, of course, puts a lot more administrative burden on business itself because of tracking.
I was, at the time when the GST was introduced, in a corporation that was subject to GST, and the cost to us of operating a system that actually was tracking the input cost of GST and the output cost of GST was quite astonishing. It virtually destroyed the entire budgetary system of the corporation as far as looking at goods and services purchased. So there is a shift and there is a cost to business of this fact. Would you like to comment on that?
Dr Mintz: Yes. First of all, I think a large part of the costs were startup costs as opposed to ongoing costs from the work that I've seen done and what people usually talk about.
I'm just trying to remember; your first point was on the --
Mr Peters: It was that the GST is certainly a more complex tax to collect than the RST is.
Dr Mintz: And the efficiency of doing that -- the reason the RST is relatively efficient in the way it operates is because it's such a lousy consumption tax. If it was a really good consumption tax, the way the RST should be operating is that when a business buys a product from another business it can show its exemption certificate and get relief from the tax. This is called the "suspension method" under the sales tax system where it allows a business to basically avoid paying tax on the business input.
Now, if the retail sales tax was going to really operate as a true consumption tax, consumption on consumers rather than a tax on business inputs, there would be a lot more exemption certificates provided and made use of, as well as a lot more problems with respect to auditing that would be faced by the government.
It's true that the system is maybe more efficient, but it makes it also a more lousy retail sales tax from an efficiency point of view. That's the tradeoff, I think, between the VAT and the retail sales tax, that the VAT is more costly for business -- although they're doing it already under the federal system, so if you had a joint federal-provincial one it's not going to make a big difference, it's already there.
When Canada changed from the manufacturing sales tax, let's say, going to the VAT, the VAT was clearly more complex and more difficult for businesses to comply with. Absolutely; no question about that. On the other hand, it was a better functioning tax than the manufacturing sales tax.
It's the same thing that the province would have to make up its mind on, and that's why I like the harmonization route because you could take the full advantages of the compliance costs that are already there for the GST, so if you have an Ontario tax that's joint with the GST or a joint VAT, the compliance costs aren't going to change that much. Secondly, one will get away from what I think are the lousy features of the retail sales tax.
Mr Peters: I just regret that there's nobody here from the Ministry of Finance to hear your comments.
Dr Mintz: They've heard me.
The Vice-Chair: We'll pass that on to them. We'll make a point of passing that on. Thank you very much again.
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ANTHONY DOOB
The Vice-Chair: The next witness is Professor Anthony Doob from the University of Toronto, Centre of Criminology. Welcome. Thankfully, U of T is just across the street, if you came from the school.
Dr Anthony Doob: Thank you very much for inviting me. As you mentioned, I'm a criminologist at the University of Toronto, and although I've done some research on income tax evasion, I haven't done work on compliance with retail sales and I think that my comments have to be understood in that context. At the same time, I'd suggest to you that a general understanding of the compliance with laws of this sort should be important for this committee in considering how it should approach what we presume to be an important problem.
There are really two important points that I want to make. You have my written comments, I believe, that I prepared for you last week, so I'll really just briefly summarize them. The first is that I believe that the Provincial Auditor, and more importantly the retail sales tax branch of the Ministry of Finance, would benefit from carefully considering an overall approach to compliance. This approach to compliance would be broader than simply an approach which talked about auditing and finding people who are evading. I'm suggesting that if the branch had a reasonable theory or reasonable approach to compliance with the retail sales tax, the branch would be in a better position to develop an integrated approach to increasing compliance with these laws.
The second point is really related to that which is that the ministry's tax compliance strategy should integrate research into the everyday operations of the retail sales tax branch. The marginal cost of research that's integrated into the everyday operations can be very, very small. What's needed is a mindset within the branch that assumes that continuing experimentation, evaluation and improvement of its activities designed to increase compliance overall should be central to the branch's mission.
My feeling is that neither the ministry nor apparently the Provincial Auditor appear to have a well-articulated theory of compliance with the retail sales tax. Instead what the branch has are procedures in place to address some forms of non-compliance. In suggesting the theory would be useful, what I'm really suggesting is that it gives you a framework for thinking about it and thinking about how it is that you should be approaching this whole problem. Without simply saying more of the same, we should do a little bit more, we should shift our resources in a particular way.
I suppose my starting point is that my view is that compliance is best addressed not through a series of time-consuming audits. If we're really looking at it for an analogy, what we should be looking for is an analogy with crime prevention. The best way of dealing with crime is to prevent it in the first place rather than to find people who have done crime after they've done it.
Audits are expensive for the province; they're expensive for the various people who are being audited, but what we're really looking for is something beyond that. Obviously, part of the difficulty is that simple approaches like increasing punishments by increasing penalties, removing business licences, whatever levers are available, will be effective only if they're perceived by people to be likely to occur to them.
I think that the simple approach of saying, "Well, let's deal with the broad problem of tax evasion or of retail sales tax evasion by increasing penalties," will work if people see that there's a reasonable likelihood that they're going to receive those penalties, but if they are successfully evading the taxes at the moment, fiddling with the penalties will really do very little.
What I'm suggesting is that one part of a theory of compliance would be not to focus exclusively on catching people who are evading taxes, but to address the question of the perceived likelihood of apprehension. So what we would want, presumably, would be a real penalty at the end, but what we really need, in order for that penalty to be effective, would be for people to believe that there's a reasonable likelihood of their being apprehended for their tax evasion.
Doubling the number of auditors might be cost-effective in a particular way, which is that more money might be found from people who are evading taxes, but it may not be the most efficient way of reducing overall tax evasion. What one would want would be either systems in place which would make tax evasion less likely to go unapprehended or ways in which one would increase the likelihood that people would perceive they're going to be caught for this.
In general, what I'm suggesting is that the response we give or the province gives to a crime such as tax evasion gives an overall message about how important it is, among other things, and that we should really address those broader issues, not instead of but really in addition to the issue of evasion.
When I looked at the auditor's report and the ministry's response to it in determining what it is they should be doing, the problem I saw was that there was a focus very much on apprehension rather than compliance. As I've already said, the distinction's an important one and the shift, which I think could be effective, or at least more effective, would really involve a shift towards compliance, away from apprehension.
Let me give an example, and it's in the written material so I won't go into it in detail. There's some evidence from other jurisdictions that certain kinds of audits have a peculiar effect on the likelihood of future compliance, that an audit of a particular person -- I'm really talking about income tax, so you're going to have to hope there's an analogy to the sales tax problem -- may, for example, find undeclared income or it may more likely, in the income tax area, find deductions which are inappropriate.
The tax collector may then get some money. If you look at the money recovered and compare that to the money expended, you may find that there was a profit to the tax collector from this activity. But what's ignored in that approach are really two things: One is whether we're missing opportunities to convince other people that they are likely to be caught, but also you're ignoring the long-term impact on that particular taxpayer. The impact on that taxpayer may be that the taxpayer has actually learned from the audit where he can get away with income tax evasion, or with tax evasion more broadly, so you give away a little bit to the tax person but you also find the areas where the auditor was unsuccessful.
There are ways to assess this, and really that's my second point which I go into in some detail in the written comments, and that is, one way to approach these problems of how best to collect retail sales tax, if that's the goal, in the long run overall is really to adopt an experimenting attitude. When I read the auditor's report, or when I read the responses to it from the retail sales tax branch, obviously one of the concerns is one of resources, how much resources should be put into this.
One of the ways to see whether the resources are being used effectively is to take advantage of the fact that the tax collector doesn't have the resources available to audit everybody or to do all the kinds of things that the branch would like to do.
That means that instead of targeting particular areas and going in and looking at the amount of money that was collected you simply take an experimenting attitude and say: "We're going to compare different approaches -- different approaches in different municipalities, different approaches with different kinds of taxpayers -- and we're going to look not so much, or not exclusively, at the amount of tax recovered, but we're going to look to see what happens with that taxpayer or people associated with that taxpayer or people in the same geographic area, or whatever one's theory is about the impact of this. We're going to be able to compare the amount of tax paid, because ultimately that's what we're interested in. We're not so much interested in how much we collect from this taxpayer today as much as we are in how much tax the province gets overall from similar taxpayers or from this taxpayer over some period of time."
If you have a comparison group that hasn't been receiving this kind of special treatment, it's actually extraordinarily straightforward to find out what the long-term impact is not only on this taxpayer, but on other taxpayers. What I didn't see in both the auditor's report and in the branch's response to it is an approach which looks to the long term, which looks to the problem of tax compliance overall, rather than looking to finding people who are evading taxes. I was very seriously discouraged by the lack of imagination the ministry showed in its response to the suggestion from the auditor that there be additional research.
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To remind you, the ministry's response was that it agreed in principle with the recommendation that there be additional research. They mentioned an agreement with Revenue Canada that refers to this objective and then they talked about how they would do more when their computer system was working.
Quite frankly, I found that completely inadequate. I found it inadequate because it seems to me that as long as the province believes it should be collecting taxes through this particular mechanism, I believe it's important for the auditor to encourage the branch and for the branch to respond in such a way as to say: "Look, we're looking for different ways, we're looking for effective ways to do this and we're experimenting constantly and immediately integrating the results of this research into our strategies, to look for ways of increasing compliance with the tax overall."
The branch has a measure which is very straightforward and it has the ability to do the kind of research which very quickly could lead to an improved use of its compliance resources.
For example, when the question comes up in the report of small-scale audits, the question of how best to do those, how to deploy resources should be looked at in this way: Look at it as a problem which is not going to be solved by a bunch of people sitting around a room. It's going to be solved by a group of people figuring out what the best strategy would be in the long run.
My supposition is that the retail sales tax branch of the Ministry of Finance has some very talented people who would be able to articulate very sensible and testable theories of how overall compliance would be best increased. No theory and no strategy is going to be perfect, but if I had been the Provincial Auditor, what I would have done is made two clear recommendations.
The first is that they should think seriously about an overall compliance strategy. It doesn't need to be a long, tedious academic exercise. I'd suggest exactly the opposite. Some careful and creative thought and exchange about how to do it, it would seem to me, would be a good place to start.
The second is that those ideas should be immediately tested in an experimental way where you go out and see what the impact is of one strategy as compared to what's going on at the moment.
I would urge the committee, instead of endorsing a more-of-the-same approach to tax compliance or more auditors doing exactly the same as they're doing at the moment, to look to ways of fostering a broader and more effective way of approaching a very serious problem. The kind of research I'm suggesting that could be done and really can only be done by people within the ministry need not be complicated, need not be long term. This is work that could be done very quickly and could be turned into action very quickly.
I have more elaborate comments, as you know, in the written statement, but I'd be happy to answer any questions you might have.
Mr Crozier: Good morning, professor, and I'm pleased to have you with us. On page 4 of your written text under "What should the focus be?" you say, "Not necessarily pictures in the newspaper of tax cheats -- though it is not clear why one wouldn't treat tax cheats the same as we treat any other ordinary criminal."
I would suggest that someone who decides on a life of crime, let's say theft, perhaps may be even considered a professional. They know the risks. They know the benefits that can be derived from it. When they go about that and they're caught, we in many instances put them in jail. What I'd like you to comment on, when you say it's not clear why one wouldn't treat tax cheats the same, is that are you saying you really don't know yourself how they should be treated, or could you comment on a tax cheat who steals from me, because I'm the other taxpayer who doesn't cheat, and how that should be treated in the way of penalty?
Dr Doob: The issue is that I would see economic crimes against the government as a broad category of offences and it would seem to me that we should have an approach which deals with them in a fairly similar way. This is a somewhat separate issue, but I think the argument is that one can cheat the province of Ontario in a variety of ways: by evading income tax, by evading sales tax, by stealing from the province, by claiming benefits one is not entitled to; all of these are ways of cheating the government, of committing an economic crime.
For what I would call ordinary crimes, we're not very good at it but we actually do have an idea that what we should be doing is trying to dissuade people from committing those offences. One of the ways we do it -- as I suggested, we don't often go about it in a very effective way -- is to try to convince people that they'll be caught.
The most obvious example of this in criminal law are the attempts by the police, usually unfortunately located at particular parts of the year, to catch people who are driving while impaired. That's really a deterrent strategy rather than an apprehension strategy. We know in December that there are more police resources, or we believe in December that there are more police resources being used for this purpose. So we have an overall strategy and when we do apprehend people for these kinds of offences, we publicize it, we publicize the RIDE program in this province, in part to try to convince you and me not to drive after we've been drinking.
One of the problems is that if you have a strategy for tax compliance which doesn't let people know that people are being apprehended and are being punished and the punishment is a very real one in terms of their own reputation, it seems to me you're losing whatever deterrent possibilities are out there.
What's important in deterrence, and we know this over and over again in criminological research, is that people have to perceive that there's a likelihood of apprehension. Well, I've never heard of anybody being penalized or being stigmatized in the same way that they are for criminal matters -- let's say, in my case, since I'm not a vendor -- for actively participating in or encouraging the evasion of sales tax. I've never heard of that. I assume there are some, but if I had to point to a single instance I couldn't find it.
So I'd say: "What's the probability of being apprehended for evading these kinds of taxes? It must be extraordinarily small." I may be right, I may be wrong, but it's my perception which is going to guide my behaviour. I'd suggest we should approach that as a question, how we should think about it. I'm suggesting obviously that what we should be looking for are ways to get us all to comply so that we don't have to go after the bad guys.
Mr Crozier: When some honourable citizen wouldn't go up to the provincial till and open it while there's no one around and take $100 out, whereas a law-abiding citizen will participate in the evasion of tax by dealing in cash, could you comment on how you feel the public feels about this?
Dr Doob: A few years ago, as I mentioned, I did some work on an income tax evasion and what we found was that if you ask people, "If you cheat the government for $1,000 through income tax" -- I don't imagine it would be any different for any other kind of tax -- "how bad is that, as compared to taking it out of the till from the government?" It's the same amount of money, and so on. What happens is that of those people who see a difference, it's about nine to one who see the tax thing as not very serious.
That's the difficulty with that. There's one other crime I can think of aside from, broadly speaking, tax evasion that's like that and that's smuggling. We joke about smuggling and so on, but one can look at that in a very similar way.
I think the difficulty is that we as a province have policies in place which encourage that, and we always have. We will spend an enormous amount of resources prosecuting the person who steals something from the government or claims unemployment insurance or claims welfare inappropriately. Those are crimes; I have no difficulty calling those crimes as well. But if somebody evades sales tax by similar amounts, we deal with it as if it were the same as a parking infraction.
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I don't think you can get people to take it seriously as long as we say it's all right, that it's just like a parking infraction. I go and I put my loonie into the meter and I come back an hour and a quarter later and there's really no problem as long as I don't get caught, and nobody sees it as a serious problem. I don't think that one happens to be a serious problem. If we want tax evasion to be seen as a serious problem, we have to treat it in a serious way. I don't think it's very complicated.
Mr Crozier: I suspect that many of us know people who consciously avoid tax by dealing in cash or whatever way there might be. I would even be surprised if some of us didn't have that opportunity presented to us, and then it's a question of conscience. I get the feeling that a crime such as this against the state is not quite the same in their minds as a crime against your next-door neighbour.
Dr Doob: No, but I think it's more than that; I think it's particular crimes against the state. As to your initial example, there's no question that stealing $1,000 from the government by not paying your tax is not seen as serious as stealing the $1,000 from the neighbour or from a corporation. But in addition, it's the way you take the money from the government. If you take it by not paying taxes, it's just not seen as serious as taking it by walking out of the building with something valuable.
There's something very peculiar about tax, but as I said, I think we also have to take some responsibility. There's something very peculiar about the way in which the government deals with tax. I think you don't deal with it as if it were a serious problem.
I just want to make one other point, and it really does come down to this question of looking at compliance. I guess it came up in listening to Jack Mintz talking about these issues. If you're looking at an overall compliance strategy, you also have to remember that in terms of evasion of retail sales tax, it's probably the case that the province is also losing an enormous amount of money through that mechanism of a cash economy and a deal to evade the retail sales tax, but the province is also losing money through the income tax system because that money never gets seen by the income tax. If a vendor says, "Yes, I'll take cash, and you don't have to pay the GST and the provincial sales tax," that money is cash and it also doesn't go into income. The estimates of what's gained by a compliance strategy are probably enormously underestimated.
Mr Crozier: Just one more point, if you wouldn't mind commenting: Having once evaded tax, even if we attempt to change the public mindset, how difficult is it to get me, the tax evader, back on track having once accomplished it, even if the tax is reduced?
Dr Doob: I think the issue you heard from the previous witness is the problem. I would agree with him that the difficulty is that once you start people into a particular expectation about how things are happening, it's going to be very difficult to undo.
The problem you have is not going for a perfect system but going for a better system. What you have to do is to look for ways of increasing overall compliance and say, yes, we've lost some people, but what you may be able to do is say, if we knew where we were losing, what kind of money we were losing and the way in which we were losing it, maybe we would find other mechanisms to plug up those holes.
Let me just give an example, and I'm just talking to you about how you do this. I've always wondered why the provincial government, or in fact why Revenue Canada, any tax collector, doesn't go up to a group of taxpayers, starting, let's say, January 1, 1996, and say: "By the way, you know we do audits. We're doing a new kind of audit now. We're going to tell you in advance that you're going to be audited for the first four months of this year, and we want you to keep a special kind of record. It'll save us all time -- save you compliance time and save us compliance time."
If you were such a retailer or taxpayer, whatever it might be, in that circumstance you say: "From January 1 until May 1, I'm going to have to keep pretty good records. They're on my case. I'd better walk the straight and narrow and pay all my taxes."
If you do that to 500 taxpayers and you have another 500 equivalent taxpayers you don't do it to -- you don't have enough resources to do it to everybody anyway -- one of the things you can find out is where you're losing your money. Those people whose case you're on originally don't have an enormous incentive to evade; they have an enormous incentive not to be caught during that four-month period and they can see the end of the road at the end.
You have a very good idea, then, as to where you're losing your money. What you may be able to see at the end of this process -- you're talking about a four-month process. You look at your information, you see how much tax they've paid -- they're undoubtedly going to be paying more tax -- but you've got an enormous amount of information about where you're losing it. Then you say, how we can deal with that? These are folks who have been evading for a long time, and lo and behold, they're paying more taxes for this four-month period when the retail sales tax branch is on their case.
It's not rocket science to find these kinds of things out and to say, "How can we actually do it better?" It really perhaps is a way of addressing your question, "How do you get these folks back?" Maybe you get them back by getting them to comply in the first place.
Mr Beaubien: Professor, what a breath of fresh air. If we go back to the first meeting we had, I think I made some comments that the system was broken, that there is something drastically wrong with the archaic system we run. If we look at government overall, it's broken, it's too big, it's too unwieldy, it's very inefficient, and if we relate it back to the Ministry of Revenue, the same thing applies.
However, I think this committee is of the opinion that by putting 50 or 100 more auditors or however many more we want to put in, we're going to solve our problem. I happen to concur with the professor that I don't think that is the problem. It is the problem, but the compliance strategy has to be changed. I think we should listen to the professor. I think the last example he gave us is a perfect example of how we become innovative in applying new tactics in collecting taxes. Is it a moral issue we're dealing with? For most people, it isn't.
I think I related in the first meeting that if we had an officer at every corner we would still have speeders, we would still have people breaking the Highway Traffic Act. We cannot have enough auditors in this province. I think it's a mindset that we have to instil in people, that we are here as part of a society and we have to do our part.
I have been audited both by Revenue Canada and by the retail sales tax. Thinking we're going to walk into somebody's office or somebody's business operation with a big stick and make him comply -- folks, give your head a shake. It's not going to work. I think the professor has just told us that today.
What we need to do is not to hire more auditors or redeploy more auditors. We have to look at, what is wrong with the system? Why is this system failing us? We've been collecting taxes the same way we've been doing for the past 100 years. Society has changed. Yes, we have computers today and we didn't have computers 50 years ago, but basically we are still collecting taxes the same way we did then while society has changed tremendously, and we have not addressed that. If we think we're going to solve the problem, whether it's mainly avoidance or evasion we're concerned about, I don't think putting more people on to audit other people is going to work.
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Mr Hastings: I generally would echo my colleague's comments about the whole approach: that if you put more people on, you should earn more income as a result.
I'm just wondering whether just an overemphasis on more compliance and higher penalties and maybe making a rogues' gallery out of these folks -- and I'm not saying by that that I'm in any way condoning or saying, "Jeez, these aren't bad people, they were just playing around a little." We know there are a large number of folks who are deliberate evaders. That gasoline-tax gentleman who was taking the coloured dye out of product and selling it as a conventional gasoline is a good example.
But I'm wondering if you could give us your thinking on what other components of prevention might be enhanced here to balance off what seems to be an overemphasis on the notion that if you just increase the penalties so much -- double them, triple them, quadruple them -- somehow or other that's going to reduce the amount of tax cheating, whether deliberate or incidental. Do you see any kind of award system?
What I'm trying to get at here is a better use of moneys to the small business sector for the collection they're doing in terms of the amount we're giving them, which to me is basically a pittance; you might as well just take away what's left, because it's so incidental to the time that's incurred in the collection of tax on many products.
Dr Doob: Let me give one example, and this is not a very specific one. One of the issues that comes up is, to some extent, what we're not doing. In some sense, the committee is in a position to change this. We're not going to the people who undoubtedly have a lot better intuitions about these kinds of things than I do, and that would be the field people who are out there working with the people and probably having pretty good intuitions as to where they're not finding things. They go in to a retailer and find a few hundred or a few thousand dollars, but they know perfectly well they're missing a whole lot and they're not sure where and they know they're never going to find any records.
My feeling about it, if it were my job to do, is that I genuinely believe that a lot of these people who are in the field doing the day-to-day slogging work on this stuff go in and say, "What we need to do, the way we would find this information or the way we could get this information -- nobody likes paying taxes, nobody likes giving out money, but we could find a way to make it easier" or to close something up or whatever it might be.
Let me just give you an analogy. Again, the work I've done is really in income tax rather than in retail sales tax, but when I was doing some work on income tax one of the questions we asked people -- and people were remarkably open about talking about how they evaded taxes -- was how likely it was that they would cheat on their income tax under two different circumstances. This would be at filing time in April for personal income tax.
The two circumstances: To one group of people we said, "Imagine that you do your calculations and you figure you owe the government a certain amount of money and there hasn't been sufficient money withheld," as is the case for many of us. "How likely is it that you'd cheat under those circumstances?" The other circumstance was: "Imagine the situation where you're going to get a refund." What people are interested in at income tax time is how big the cheque is that they're going to write or whether they're going to get a refund. It turns out people are dramatically less likely to cheat to get a bigger refund than they are to keep from having to write a big cheque to the government.
In terms of strategy -- and it isn't that simple -- that means that any system which overdeducts is going to reduce tax evasion, because if you can reduce the number of people who have to write cheques to the government on April 30, you're going to reduce tax evasion.
That's as trivial a problem as you can imagine. If there were some analogy -- I'm saying that's just one example and it's from a different area, so I don't have a quick one on this one, but that's the simplest thing in the world if we were willing to, in a sense, create deduction systems which tended to deduct more income tax from people. Or in fact the business of people who have mixed kinds of incomes or income from various sources who have to pay by instalments: If you've overpaid by instalments, you're not going to cheat at the end, it turns out.
I think that's a very simple one. I think I would go to people and talk about it, and talk about it in terms of the situation. It may be that there are some additional compliance costs which you would want to impose on people that would, for example, track money, which would make people believe that they're going to be caught. Something like the prospective audit, for example, might make people say, "It's just not worth it for the amount that's involved to evade this tax in this way."
As I said before, I think the worry that you have is when the retailer says, "I'll give it to you, but you don't have to pay the taxes as long as you pay in cash." It's not the 8% that you're losing; it's the income tax you're losing that you should really be worrying about.
Mr Hastings: Do you think we should be giving somebody from the outside -- I'm not big on consultants all the time -- getting somebody to design, in conjunction with those folks who are out there on the front lines collecting the tax, a good survey as to how we could make the compliance more effective in terms of patterns of collection that you allude to in this proposal? In other words, we'd get some of the folks in the retail tax collection branch working more smartly; not necessarily, as the mindset seems to be, that we have to either have more bodies doing the auditing or we have to have more technology, which I'm usually in favour of if it'll yield better results over time.
Do you think we need to be doing some kind of design strategy or survey to see how we can cast a wider net on the compliance side in those sectors that generally don't yield a lot of money anyway -- although we know there's quite a bit of incidental tax cheating going on out there: flea markets, art gallery sales by the wholesale-type art gallery that you see around, estate sales, that sort of thing.
Dr Doob: How you turn around an organization, an institution, is a tough one. What I would hope is that the committee would take it on as its responsibility -- whatever powers the committee has -- to try to urge the retail sales branch to take a different approach to it. My reading of it is that they need some pressure; they need some tough words from you for them to take on this kind of approach.
At the same time, as I said, I have a basic belief that they're doing in a sense what we've always told them to do. I'm reluctant to be too critical of individual people, because all we've ever told them to do is, "Go out and audit, audit smarter and do it a little bit better." We haven't told them, "Wait a minute, stand back from it all and really think." If you tell them to do that -- you know, I'm sort of sceptical of outside consultants. I wouldn't want this to be a big cost; I don't think it needs to be a big cost. The people there, I would assume, are intelligent enough to take this on as their job, which is really what you want. You don't want a consultant to come in and do a survey and whatever; you want it to be them, where they say at the end of three months: "Look, we're really finding something out here. We're finding out that folks are evading through this mechanism."
In terms of audits, that's what we should be doing, and we're finding out that when we go in there and in a sense let people know that we're doing a blitz audit on this particular location, everybody else all of a sudden starts remitting more money.
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Mr Hastings: So what you're really talking about, then, is changing the whole orientation and philosophy of a probably bureaucratic approach they've had, command-down types of directives and memos, the usual --
Dr Doob: Yes, where the only tool they have --
Mr Hastings: -- instead of a quality team assurance approach, which is pretty innovative, I guess, in its place.
Dr Doob: I think the important thing is that they see it as beyond -- you know, if you look at it in terms of measures, in some sense the Provincial Auditor did the same thing. If you said, "What is the measure of the success?" -- if the measure of success is how much you spend on an audit and how much you get back right away, how big the cheque is that you get from the taxpayer, as long as we evaluate them in that way, then of course they're going to say, "Give us more auditors and we'll give you more money."
I think if we start evaluating them by saying, "We're interested to see whether you can increase overall compliance and we want some good measures of overall compliance." There are good measures out there. As I said, this isn't rocket science. This isn't complicated things. You don't need expensive consultants. You probably don't need consultants. You just need to change the way in which you're doing that and to say, "What we're interested in is how much money you bring in, not how much money you get out of individual people who have evaded."
Ultimately, if for example you lose a little bit in terms of the number of people you catch doing tax evasion but gain by overall compliance, I'd see that as a big plus, because that's what you want. It's the same thing as impaired driving. You don't want to catch people at impaired driving; you want to keep them from doing it.
Mr Hastings: More strategic use of the existing --
Dr Doob: Of their resources, yes. But they may need more resources. I can't judge resources. They may need more resources, but I think what they should be showing in order to get more resources is that they have an overall compliance strategy which will actually increase overall compliance, and in order to do that, they need more resources or the same resources. In my ideal world I'd tell them to think about an overall strategy and to come back and report to you.
Mr Hastings: Finally, in your own reading, or talking to people in this field, are there any particular jurisdictions that have a model that is even slightly akin to what you're recommending?
Dr Doob: I honestly don't know. There may well be. As I said, this particular kind of tax isn't something that I know. I know that the problem of doing experimentation and looking at overall compliance is not part of the mindset of people who are in this business. They talk about overall compliance, but I don't see the evidence of an overall strategy in that way.
You see it to some extent in income tax things. When I was looking, at one point, at the United States in terms of the way in which income tax is done, there is a variety of things they do which are really attempting to try to increase overall compliance, largely in terms of tracking money, in terms of making it open where money is moving, and if you know where money is moving, you obviously know where you can tax it.
Mr Hastings: Thank you very much for your insights.
The Vice-Chair: Mr Peters has a few comments and questions.
Mr Peters: I'm very happy you're here and raising these points. We seem to be, in spite of your comments, somewhat in accord. I'll quote directly from our report here. We're saying "We question whether compliance with the law is being adequately enforced and whether public confidence in the fairness of the tax system is being maintained." That is the thrust of my report, and I think that seems to be in agreement with what you are saying.
That is the thrust of my report, and I think that seems to be in agreement with what you are saying on this matter. Furthermore, we did make a recommendation to research the study and we also sequenced, rather interestingly, what the areas of research are, and this may be of interest. We said first research compliance; research enforcement; research sector-by-sector analysis; and audit is the very last point.
The point of why we raise the audit -- and Mr Beaubien, if I may speak to your comments as well -- we don't view audit in itself as a final solution. What we were very concerned about was that audit had deteriorated to the point -- and by agreement with the ministry, it's only in closed session that I can share with you, not in Hansard, to what point it had really deteriorated. When we do our reports is one of the problems we are facing. If we get into the how-to areas, how to enforce compliance, we put out into the public the blueprint of how to avoid taxes, so we are somewhat handicapped by this.
I'm somewhat influenced in this by statistics and I'll show you. We have a poll that was done by COMPAS in 1995, where Canadians were asked if they have become more determined or less determined to avoid taxes. This shows that 42% -- I think there's that percentage, is there, Jim?
Mr James McCarter: Yes, it's 42%.
Mr Peters: So 42% is much more determined to avoid taxes; 35% somewhat more, so we're way over half by now; 8% felt the same; 11% only somewhat less; and 5% much less. I'm bringing up this handicap in our report to answer the how-to question, how do we do it? That's why we stay in the general and we say to the ministry, do we do research?
To give full credit to the ministry, many of the points that Professor Doob is raising are right. They do have the knowledge; they do have it in there. But one of the principal pieces of audit is not just that the person is out there doing an assessment and bringing back $407. That was the only indicator we found and that is the only indicator we reported, but there are two very specific additional indicators, and I think your example points that out.
Number one is that the auditor also comes back with a direct field knowledge. It comes out that he's one of the best direct contacts that the ministry has with the field. He doesn't just come back with a report that says: "Gee whiz, I really did great. I recovered $407 for every hour I audited"; he also comes back with information that says, "This is what's going on out there," he feeds that information back to the ministry and that leads to regulation and other things.
That leads -- and you may want to comment on that -- to the second point: the ripple effect from audit. In other words, if I could share with you how little auditing that is really done in the small vendor community, I'm sure you would be as shocked as we are. We are really questioning, in a way, how much ripple effect are we getting from the audit? What I mean by "ripple effect" -- really the fundamental issue that you seem to address is that to get better compliance, there has to be a change in attitude towards the tax itself, and how one achieves that is really a big question.
We, as auditors, get into a policy area if we start making recommendations as to how to change attitude or how to change the law. That is the role of a committee such as yours and that should be addressed here; that cannot be addressed by us. That seems to me to be at the bottom of it.
One of the attitude changes you're referring to is what my brother, who's a professor of psychology, always tells me is the "control monkey" theory. What they did was they operated on the brains of monkeys in order to determine what impact on the behaviour resulted simply from having an operation as opposed to what they did to the brain. They operated on two monkeys. On one they just did the cutting and suturing and on the other one they actually did the brain operation.
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If there is a way in which one can actually go to the taxpayer community and, say, separate them out and say, "We're doing something with you but we're not doing it with the others, to see how it changes your attitude," the how-to that could come from somebody with your expertise would certainly be welcome.
The Vice-Chair: If I could just interject, we just got a call that the House leaders are meeting and they would like to know whether we want to meet during the recess period. We have to indicate to them whether we want to or not as a committee. Sorry, perhaps we'll just take care of this.
Mr Peters: That's okay.
Mr Crozier: Certainly the clerk could help us on this, but I think we do normally ask for some time kind of equal to the number of hours that we would have met had we been here, only maybe a couple of days joined together. Isn't that the way it usually works, Todd?
Clerk of the Committee (Mr Todd Decker): We've usually asked for and received around two weeks in the intersession periods to deal with sections of the Provincial Auditor's reports.
Mr Crozier: I would suggest that we ask for that time.
The Vice-Chair: Any other comments?
Mr Beaubien: One last comment, and I will make it brief.
The Vice-Chair: No, just on this --
Mr Beaubien: Oh, on the meeting? I'm sorry. I agree with Bruce.
The Vice-Chair: Is that an agreement, that we ask for that two-week period?
Mr Peters: Could I just make a recommendation? We had a problem with that last time. Could you make it a formal resolution?
Mr Hastings: I'll move that it should be the sufficient amount of time. I'd like to create it so that it's flexible. We're dealing with Mr Peters's report in other areas. Is the amount of time, Todd, that you're suggesting sufficient and adequate to deal with the principal items we need to?
Clerk of the Committee: The subcommittee had identified three areas from the Provincial Auditor's report that it wanted to deal with: the retail sales tax, Jobs Ontario Community Fund and the Ontario Parole Board.
Mr Hastings: In your experience, it should be enough time, two weeks?
Mr Peters: If time permits, you may want to add some others, depending on how you do, but there's at a minimum three topics that the subcommittee had decided would be worthwhile looking at.
Mr Hastings: I'd recommend that we at least do two weeks, and if the subcommittee suggests another one to cover the other topic, so be it.
Mr Crozier: Probably we should ask for four so we'll get two.
The Vice-Chair: So we have a resolution here, a motion moved by Mr Hastings that we ask for the two-week period in the intersessional period to meet as a committee. All in agreement? Opposed? It's carried. We can forward that on.
Okay, if we can now get back, we'll just let Mr Peters complete his comments and then Mr Beaubien wanted to make a comment.
Mr Peters: I'm fine.
Mr Beaubien: The only other comment I would like to make is -- and that's why I believe that we have to have a new compliance strategy and we have to assess ourselves as to what we do as a government -- if we look at the abuse, the misuse in the system, if you read the newspaper in the past few days and you see how people have $80 lunches, how they rent vehicles and how they spend the taxpayers' money, why in the heck should a guy making $30,000 a year, whether it's income tax or a guy having sales of $100,000, comply when he sees that his money is abused by the politicians, by the bureaucrats?
We not only have to look at what the problem is, but we have to look at the overall picture, and that's why I think it's imperative that we have an overall compliance strategy and examine ourselves -- the bureaucrats should examine themselves -- how we provide the service, how we deliver the service. Until we eliminate all the abuses -- you'll never be able to eliminate all the abuses, but until we control them at least somewhat, I don't think people will control the way they pay their taxes. I really feel strongly about that.
Mr Hastings: I couldn't agree more with Mr Beaubien's outlook and comments. I would simply add, is there some way that the auditor could look at ways of creating indicators of value for the moneys that are being collected and not just success ratios of the amount per hour or however you measure the productivity of the auditors in the field so that we start to establish a strong linkage between value the taxpayer is paying, whether they be individual or business, to the amounts collected. That kind of thinking I think we've got to start to get into.
Mr Peters: I would agree with that. In fact, in our report, the one area where we came closest to making those kinds of suggestions was when we reviewed indeed the information technology used, where we've certainly identified for the ministry, and they agreed with us, a number of other indicators that information technology could provide to them to deal more effectively with compliance and enforcement of the law. Hopefully, that goes further.
I may be at some risk. I'll share with you that as a follow-up on our audit, we're now working together with the ministry on dealing with the issues of efficiency and effectiveness of the tax collection system. They have come forward and asked us for further input, and this is a service we're gladly providing.
The Vice-Chair: If you could take the chair, Mr Crozier, just for one second.
Mr Mike Colle (Oakwood): I guess this is a follow-up. I know it seems to be consensus that we'd like to maybe look at some of these innovative ways of introducing this overall compliance strategy, and I'm just wondering if the auditor can be specific to ensure that this committee knows what is required to follow through with this perhaps new, innovative approach.
In other words, there's got to be sort of some mechanisms that we should at least be made aware of that we can support your attempt to bring forth these mechanisms to follow through on this approach, because I'm pretty sure it takes more than just a communication to the Ministry of Finance. Where we're going to have to ask for some specific, I think, approaches that we want to endorse, perhaps it'll accomplish this end.
I think you know that best, because I guess what we're saying here is, you know, just auditors and increasing the audit capacity as business per usual is not going to work. We'd like to look at ways of achieving these different approaches to achieving that end, with perhaps some specific details on that.
Mr Peters: The most clear-cut mechanism on that, and this is in fact a time-consuming one that you may want to consider even in the two-week period, is that as a result of your examination of our chapter, there will be a report written by this committee to the House, to the assembly, and in that you have the right to add any number of recommendations you would like to do, including the areas I identify for follow-up or further exploration by the ministry. Does that help in that regard?
Mr Colle: Yes.
Mr Peters: Because that's a reporting mechanism. You have a choice of how you want to deal with, for example, the good testimony given to you by Professor Doob as to whether you -- it ranges all the way from letting Hansard stand to making a full-blown report of your own as a committee in which you add recommendations for follow-up by the minister through the Legislative Assembly.
Mr Colle: I think that's helpful, so for the committee to look at the different ways of reinforcing the fact that -- it's been indicated to us there are certain things that can be done and we want to ensure that it's not just another Hansard report that goes forward and is lost and another year goes by. I think it is up to the committee to decide if it wants to produce a report with certain recommendations, maybe a couple of pilot projects that can be measured and monitored and report back to the committee on, that type of thing. At least we can see that these approaches are being followed up on.
The Vice-Chair: Any other questions or comments before the professor leaves? I want to thank you very much. I think the committee is certainly very responsive to your ideas, and hopefully it will help in coming forth with some interesting innovations. So thank you very much for coming before us.
Motion to adjourn?
Mr Hastings: So moved.
The Vice-Chair: Merry Christmas, I guess, to the committee members.
The committee adjourned at 1200.