NON-SMOKERS' RIGHTS ASSOCIATION
ONTARIO HOME BUILDERS' ASSOCIATION
CANADIAN FEDERATION OF INDEPENDENT BUSINESS
CONTENTS
Thursday 28 October 1993
Underground economy
Ontario Chamber of Commerce
Don Eastman, vice-president, policy
Joe Couto, coordinator, economic policy
Non-Smokers' Rights Association
Garfield Mahood, executive director
David Sweanor, senior legal counsel
Ontario Home Builders' Association
Stephen Kaiser, president
Phil McColeman, immediate past president
Canadian Federation of Independent Business
Judith Andrew, director, provincial policy
Catherine Swift, senior vice-president
John Bulloch, president
STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/
Prince Edward-Lennox-Hastings-Sud ND)
*Acting Chair / Président suppléant: Cooper, Mike (Kitchener-Wilmot ND)
Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)
Caplan, Elinor (Oriole L)
*Carr, Gary (Oakville South/-Sud PC)
*Cousens, W. Donald (Markham PC)
*Haslam, Karen (Perth ND)
*Jamison, Norm (Norfolk ND)
*Kwinter, Monte (Wilson Heights L)
Lessard, Wayne (Windsor-Walkerville ND)
Mathyssen, Irene (Middlesex ND)
*Phillips, Gerry (Scarborough-Agincourt L)
*Sutherland, Kimble (Oxford ND)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Cooper, Mike (Kitchener-Wilmot ND) for Mr Sutherland
Dadamo, George (Windsor-Sandwich ND) for Mrs Mathyssen
White, Drummond (Durham Centre ND) for Mr Wiseman
Wilson, Gary (Kingston and The Islands/Kingston et Les Îles ND) for Mr Lessard
Clerk / Greffière: Mellor, Lynn
Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service
The committee met at 1005 in committee room 1.
UNDERGROUND ECONOMY
The Chair (Mr Paul Johnson): The standing committee on finance and economic affairs will come to order. We're continuing our hearings into the underground economy.
Mr Monte Kwinter (Wilson Heights): Mr Chairman, I don't know whether it's a point of order, but it's a point of information: Can I get a clarification on this material that was just distributed to us?
On the memorandum dealing with the summaries of reports on the underground economy, on page 1, actually page 2 but the first page in the report, in the third paragraph the last sentence says: "Tax avoidance has, however, been compounded since 1991."
Can I get a clarification as to whether that's tax evasion or tax avoidance?
Ms Elaine Campbell: We'll check that.
Mr Kwinter: Okay.
The Chair: I would be inclined to agree with you, Mr Kwinter. I think it's evasion, but we'll check that out for sure.
ONTARIO CHAMBER OF COMMERCE
The Chair: Our first presentation this morning is from the Ontario Chamber of Commerce. I'd like to welcome Mr Eastman and Mr Couto to the standing committee on finance and economic affairs. Whenever you're comfortable, please continue with your presentation.
Mr Don Eastman: I'd like to thank the committee for permitting us to appear before you. I am Don Eastman, vice-president of policy for the Ontario Chamber of Commerce, and with me is Joe Couto, who is our coordinator of economic policy.
The underground economy is inherently difficult to measure because it is underground. We share, along with many other people in the province, the strong conviction that the underground economy is a large factor in the province and one that is growing rapidly. In consulting with our over 200 local community chambers, this conviction was very much confirmed, as Mr Couto can tell you.
In order to understand what is happening in the underground economy, it's useful to approach it in the same way a good detective approaches a complex crime: Look for motive and opportunity.
We should point out that not all of the hidden, unmeasured economy is illegal or even undesirable:
(1) Self-performed services are often overlooked but do improve overall economic wellbeing. Some examples would include doing your own car repairs, sewing your own clothing, home repairs.
(2) Volunteer services: time that's volunteered to help Big Brothers/Big Sisters, the Canadian Cancer Society, volunteer work for political parties, even the chamber of commerce. This is work that would otherwise have to be paid for or simply not done.
(3) Informal exchange. Neighbours helping neighbours. Not formal trading arrangements but, "I'll help you with your fence if you'll help me with mine." A neighbour's sidewalk gets shovelled in the winter, and a few days later a couple of pies show up for appreciation. No formal trade, but the expectation that the street will continue to run both ways.
There are also two different types of off-book, money-based activities. One of these is activities that are hidden because they are illegal activities. The drug trade is the best example of this, but it's not the only example. Finally, there are money-based activities that are otherwise legal but kept off-book to escape taxes and/or regulation.
It is the last one that has been attracting attention and it's the one that we want to focus on today. However, we shouldn't forget the other parts of the underground economy. We feel that all of them are currently growing and costing the government taxation revenue. At least in the case of some of the volunteer activity, it's also saving the government spending, when the volunteer activity supplements our health care system and our social safety net.
While the rest of the economy continues to be mired in a long-term recession/depression, the underground economy is growing rapidly. Right now, we appear to be moving rapidly down the road to creating an economy where the real economic activity is hidden away from the tax collectors and the regulators.
In our detective work, let me begin by looking at what's been happening to motive. Most of the people in this province are like most of its politicians: sincere, honest and well-meaning. Nobody wants to feel that they are crooks or dishonest. But at the same time, nobody wants to feel that they are being taken for gullible fools.
I drove over this morning on the Queen Elizabeth highway. The posted speed limit on that highway is 100 kilometres per hour. Let me 'fess up and admit that at times I did exceed that posted speed limit. It was drive 110 or get run over.
The integrity of our tax system depends critically on the goodwill of the taxpayer. Large segments of our tax system depend on self-assessment.
The common threads that run through our investigation of this problem among our local chambers suggest a number of common sentiments: The tax system is not fair. Everybody else is cheating or trying to. A lot of the money that is collected in taxes is wasted by government. Government itself is less than 100% honest, open, and forthright; for example, the government's own accounting practices have recently come under fire from the Auditor General. There is also an overwhelming regulatory, red-tape and paperwork burden. All of this has been reinforced by legitimate concerns about survival for businesses and income adequacy for individuals.
One of the major problems of our current tax system has been the lack of credibility created by an understandable but terribly destructive political opportunism. To a significant extent, the current government has been hoist by its own petard. Having lit the fuse on the credibility of the tax system, it has seen the issue blow up in its face as tax revenues have evaporated.
It is difficult for any of us here to recall the introduction of the personal income tax, but in my time there has never been a new tax as reviled and detested as the GST. Yet its rate is lower than the manufacturers' sales tax that it replaced, it's lower than the provincial sales tax and it's dramatically lower than the marginal income tax rates which are now over 50% in this province. They too drive people into the underground economy. The GST is fairer and less economically damaging than the manufacturers' sales tax that it replaced. It is also actually less regressive than the provincial sales tax, particularly as it applies to inputs to the food chain. However, it has been turned into a touchstone for public dissatisfaction with the current tax burden. Hey, I don't like paying it, but what are the viable alternatives?
The public is frequently subjected to the myth that a lot of large corporations are earning handsome profits and paying no income taxes. It is sometimes true that corporations do not pay income taxes, if you ignore last year's tax losses or the job-creating investments we all said we wanted. When you get past the superficial numbers and look at the total corporate tax burden, it becomes very clear that the vision of large corporate free riders is a myth.
Every time a politician takes a shot at the tax system without laying out viable, workable alternatives, it becomes another excuse for thousands more Ontarians to join the ranks of tax evaders.
Yes, there are some problems with the tax system. It is in need of revision and change, but the reality is that even if it were somehow possible to dramatically increase the taxes on corporations and on the so-called rich without having any impact on depressing investment and employment, the increased tax take would have only a minor impact on the average taxpayer.
It seems to us that those who have been most virulent in attacking the GST have been the same ones who have been screaming like stuck pigs when federal transfer payments have been reduced in response to the federal government's revenue problems. You can't discredit the system and expect it to work.
Let's turn now to opportunity. We see three major contributing factors on the opportunity side.
First, with the current economic problems there is a lot of unemployment and underemployment. That means that there are a lot of bodies out there available to participate in the underground economy.
Secondly, there has been a shift in the economy from large companies to small companies. That has been partly natural but it has also been partly driven by a substantial bias against large companies in the tax and regulatory system. Taxes and regulations are too high for everybody, but particularly for large corporations. The reality is that it is a lot easier for small companies to engage in the off-book underground economy than it is for large companies. When the owner is the person behind the counter or who shows up at your door, there are not nearly as many checks and balances and auditing processes as when that person is the employee of a large, publicly traded company anxious to make sure that some of the sales revenue actually makes it back to the shareholders.
Finally, there are too many complex taxes which spread what should be an adequate number of collectors and auditors way too thin. Back to my highway analogy: Everybody seems to slow down a bit when they see the radar gun.
Now what to do about it: The underground economy is a major and growing problem. From your perspective, it represents a tremendous erosion of tax revenue. While initially you may say, "Why should an organization like the Ontario chamber care," it doesn't take much analysis to understand why it's a major problem for us as well.
First, the failure to collect taxes puts more upward pressure on tax rates and tax burdens for the legitimate tax-paying businesses that comprise our membership.
Secondly, our legitimate businesses are having to face a lot of illegitimate competition, competition that has lower costs because it is not paying taxes and may not be bothering with regulation. It's an extremely sensitive topic for our membership. It's a daily moral and ethical challenge for our members, one they shouldn't have to face.
What can be done about it? It's important to address both the issues of motive and of opportunity.
First, restore public confidence in the system. Begin by restoring the integrity of government. Please give us a truly clear set of books with consistent and defendable accounting practices. Be more vigilant over spending waste. Every time a high-profile story hits the news about wasted government spending, it becomes another excuse for tax evasion.
Restore the credibility of the tax system. Begin by simplifying the system and then enforcing it. It's essential to get spending sufficiently under control in order to reduce the current tax rate burden. Right now, the effective tax rate is over 60% when the personal income tax, PST and GST are combined. That is a powerful incentive for tax evasion and further growth of the underground economy.
Reduce and streamline regulation. The costs imposed by regulation are just as damaging as those imposed by taxes. The burden created by this province's corporate registration fee, for example, and the accompanying paperwork has been far greater than the $50 registration fee.
On the opportunity side, we need to get the unemployed back to work in the tax-paying part of the economy. There has been a general failure to understand the private sector job creation process, and I mean a general failure. It's not specific to this or to any other government.
1020
We need to start by making the effort to understand why much of the business community now considers Ontario to be a high-risk, hostile environment for job-creating investment. Once you take the time to understand that, it will become clear that some of the provincial legislative and regulatory initiatives have to be substantially changed and/or undone. We believe one of the starting points would be major changes to the Ontario Labour Relations Act, Bill 40.
You cannot have healthy social programs without a healthy, tax-paying economic base. You can't pay public sector employees without tax revenue from the market economy. You can't expect the business community to get up off the floor and start creating new jobs until government takes its foot off its neck and lets it up.
Thank you for giving us the opportunity to speak to you today.
The Chair: Thank you very much for your presentation. We have about 35 minutes. We could have till 11 o'clock, actually, because we do have a cancellation today. Let's start with Mr Phillips and maybe we'll do 10 minutes per caucus to start with.
Mr Gerry Phillips (Scarborough-Agincourt): I thank the chamber for the presentation. It's a subject that I'm keenly interested in. I'll start with trying to define the size of the problem. I think throughout your presentation you indicated that it's growing rapidly. I think you said somewhere here that it's a major and growing problem. The kind of rough analysis we've done suggests that we could be losing a minimum of $2 billion in revenue a year and it could be up to $4 billion of revenue a year when you just look at the various normal factors.
Has the chamber been able to get any handle on how large the problem is? When you say it's growing rapidly, give us any indication of how quickly you think it is growing.
Mr Eastman: I don't have any numbers that quantify it. Five years ago it was a non-issue for our members; this year, an extremely hot topic. Every business seems to have its own stories of the competition it has to deal with, of being confronted with customers who say, "Hey, I ain't paying the GST and PST, and either you swallow it or I'll take my business to somebody who will." You wind up with a lot of that going on, also very clearly a lot of competition from freelancers out there, people who aren't registered as businesses but who are conducting business, as well as those who have a registered business but are conducting a significant amount of activity off the business.
Mr Phillips: Just a supplementary on that: In terms of the issues that your members face, where would this rank? Is this one of the major issues they face or is it a secondary issue that they face?
Mr Eastman: I was surprised at how much response we got to that. Maybe you want to comment, Joe.
Mr Joe Couto: We had a very short time, obviously, to prepare this and to research it, but there are certain topics that really push a button, I guess. When you start talking about taxation, the regulatory environment in the province, that's where you start getting a lot of the feedback.
In a very short time, in a week period before we were to come here, we surveyed our membership, the over 200 chambers in the province. The reaction we got back was, first of all, that they don't know at the local level how big the problem is. People at places like Cornwall obviously have had major problems, but even in places where this issue has never really been a major one I got a lot of feedback saying, "We know personally of members of the chamber of commerce who have come to us and said, `Our competition has told us or has made it very clear that they are going to undercut us by ignoring the GST or the PST.'" I think the feeling we get back from our membership is that this is a very deep-rooted problem and it has gotten a lot worse.
As Don said, this isn't something that has come up in the last year or so; it's been an ongoing problem. But it's really hit a button because what we get back from the membership is that government continues to raise tax rates and continues to impose regulatory burdens on us, administrative burdens. The classic example of that is the $50 filing fee. I have stacks and stacks of letters, of petitions, everything, on that specific tax, people saying they think that this is just another excuse for them to avoid even registering their businesses, even going out there and collecting the taxes they should be. They're offering their customers, quite frankly, these bargains, if you will.
In the end, we're all going to lose. Chambers of commerce do not like the underground economy. I think it undercuts legitimate businesses which we and the chamber represent, but it's so insidious and so ingrained that unless government looks at it from a taxation and a regulatory-burden point of view, it's not really going to be addressed.
Mr Kwinter: Gentlemen, I appreciate your presentation. One of the things that you seem to have zeroed in on is you talked about the GST and that it is the most reviled and detested of all taxes. When the GST was conceived and when the government of the day first floated out the amount, they had a 9% proposed GST, and then after a lot of criticism they reduced it to 7%. But it was supposed to be revenue-neutral, and it was supposed to really help exporters by making sure that they weren't paying a tax that didn't apply to products they were shipping out of the country.
It is my perception, and it's only a perception, that the average person feels there has been no saving with the GST, that the prices are still the same and that the GST is an additional tax, as opposed to the idea that it's not going to cost you any more, that we're just calculating it differently, that instead of having the 12% federal tax included in the price, we're going to reduce the price, and it's going to be revenue-neutral. We have situations where the amount of money that is being collected by GST is huge. We get stories like we had today, where some guy set up a dummy company, sent in a GST bill for $1 million free, received it in 30 days and went about distributing it to table dancers in the strip.
All of these things of course take away from people's confidence that somebody is in control. As representatives of the chambers of commerce and business people, what is your feeling about this particular tax? I think it's one of the major contributors to the underground economy, that when people go out and buy a product, they suddenly find they've got a 15% surcharge with the PST and the GST. How do your members feel about it? Are they accommodating, in dealing with their suppliers, the fact that there should be a reduction in price and that the GST shouldn't be increasing prices, or am I wrong in that perception?
Mr Eastman: You're very correct in the perceptions. The reality is that if you look at the rate of inflation, it really did replace it; it did not come through as an additional tax. But in terms of the way everybody has received it, there's no question that it has been a triggering mechanism. The question then becomes, why was it made into such a triggering mechanism, if you look at its rate relative to the provincial sales tax?
The chamber's position on the GST and PST is that we're deeply disappointed that the province did not opt into the GST so that we had one single tax and one set of tax collectors instead of having a double set of regulatory burdens. Within the chamber, I can say that we'd prefer it as an above-the-board, open tax, not in the hidden manufacturers' sales tax. There is still some ongoing debate on that, but I can say with some conviction that in my own opinion if it were a hidden tax, it wouldn't still be 7%. So it has been very much a triggering mechanism, but it's gone on top of a whole bunch of other things, and I think everybody in the room needs to look back and ask what their role was in helping make it part of that trigger mechanism.
1030
Mr W. Donald Cousens (Markham): Mr Eastman and Mr Couto, the chamber continues to be a responsible voice for society coming from business. I just want to congratulate you, first of all, on a very well balanced report. It's so easy to come in and start giving remedies, but I think you're very careful and show good judgement and wisdom in just trying to say, hey, there is a problem. You've polled your people and the course of action you suggest has a lot of common sense to it. You can't legislate that, but all of us have to continue to be reminded that we as politicians have a job to do.
I think what's happened in this committee as well is a good course of action, that we're at least starting to look seriously at finding the scope of the problem and then hopefully coming up with some remedies. I have seen probably one of the better spirits in this committee in the way in which we have gone about this, where there's certainly been a genuine sharing from all parties to try to at least get our hands around it.
One of the questions I had has to do with, when you did your survey of the municipalities, whether they had any sense of where some of the underground economy is most manifest. Are there some particular types of the underground economy that are more prevalent than others, and if so, what were some of the illustrations that were brought to your attention? We're having trouble, and you said it already; it's so well hidden that you don't exactly know where to look. We have a sense of where to look. Do you have any direction to give us as to some of the areas that maybe would yield some extra facts for us?
Mr Couto: I think most of the problem here lies predominantly with smaller-sized businesses. I think once you get outside the Metropolitan Toronto area, that's what we're dealing with in chambers of commerce in smaller communities. I think a lot of this type of activity is most prevalent in home repairs, car repairs, things that people have to do. You can put off purchase of a new car, you can put off purchase of a new house, but you have to keep your car and your house in shape.
We've had chambers of commerce coming to us and saying, "We have a member who does home repairs, and our estimate from that member is that in the home repair business, at least 50% is underground," underground in this case meaning they will provide an estimate to the customer and the customer will say: "Well, your competition down the street has said that they will match your price plus they will ignore the GST and the PST. Are you going to be able to do that?" Our member has to do the same thing and probably a little bit more in order to get that business.
That's the type of business we're looking at here, and that's very hard to really get at in terms of the government inspectors. They already are spread too thin. How do you get at that guy who decides he's going to do a job and not report it? Basically what we're saying here is, he's not reporting it through the tax system.
It's a real problem for small businesses. Retailers have to do this kind of stuff also, and again what they're saying -- this is a cry for help. They're not trying to be dishonest here or anything. They're saying, "I have to try and survive here, and the only way to survive is basically by breaking the law." We don't condone that and neither do our members, but if it's a question of survival or being honest and aboveboard and going under, a lot of people have to make that kind of choice.
Mr Cousens: The point you have made in your report has a lot to do with our having reached a tax wall: the GST, the perception that Monte talks about, the level of all of the increases. Do you feel there are other contributing factors to the breakdown in what I'd call societal values in the increase in the underground economy in things such as media or in TV? Are there any causes for this breakdown, other than just government, that you've come up with?
Mr Kimble Sutherland (Oxford): Other than what?
Mr Cousens: Well, just the government taxation levels.
Mr Sutherland: Oh, I thought you said this government.
Mr Cousens: No. I'll keep it clean for another 15 minutes.
Mr Eastman: There's a natural human tendency to believe we're hard done by. Will Rogers once made the comment that all of us are prepared to meet the other fellow halfway; it's just that we're lousy judges of distance. We enjoy information that helps us believe that somehow we've misjudged the distance in the other guy's favour so we can extend the line a little bit. I think there is a natural inclination on the part of all of us to believe that we should have more than we do and I think that becomes tremendously amplified when you wind up in the kind of extended recession/depression that we're in right now. So there are a lot of factors that feed into that. Tax rates are a major issue, but on top of that you have the basic issue of fairness, which is, "Hey, is everybody paying us right?" Such things as even the tax-free allowance for elected people becomes part of the rationalization. "Hey, I don't get that."
Mr Cousens: Just one final quick question then. Is there a need for more policing in order to address this as an issue, or was that raised at all in any of your surveys?
Mr Couto: I don't think you're going to solve the problem, quite frankly, by sicking the cops on our members, okay? There are not enough inspectors out there. They do a very good job with what they have, but like all of us, they are facing resource problems.
I think businesses are really looking to governments here to address the problem, and the only way you can address this is, first of all, being totally honest with people: not just businesses but taxpayers. I can tell you that the recent media reports of the Provincial Auditor's problems with the Finance minister have had an impact on people's perceptions of what is being done by their representatives at Queen's Park, and that produces that, "Well, they're not being honest; why should I be honest?" sort of thing; "Let them clean up their house; then I'll clean up my house" sort of thing.
Quite frankly, we don't want the province to be papered over by inspectors going around laying charges and fines. It's not going to stop it, until we address the fact that people are just feeling overtaxed. They are spending too much time adhering to regulatory and administrative burdens when what they should be doing is creating jobs. That's hurting workers in this province and it's hurting businesses. It's hurting governments because the revenues obviously are taking a hit.
It's not the solution, just policing it better. I think the government inspectors do a fine job as it is.
Mr Sutherland: I have just a question of clarification and then a specific question. On page 4 of your report you said, "Right now, the effective tax rate is over 60% when personal income tax, PST and GST are combined." How do you come up with 60%? We have different tax rates, but you were saying that it's 60% for everybody?
Mr Eastman: No, what I'm suggesting is that when you're looking at the tax evasion problem and saying, "Okay, what is the potential tax savings for a tax evader," it is not just the PST or the GST; you also have to look at their marginal income tax rate as well. When you combine the income tax rates, you wind up with different levels of rates, depending on where you are in the progression. Certainly the highest effective tax rate at the upper end is now over 50%, and it's also well over 50% at the lower end when you look at the clawbacks on social welfare payments.
1040
Mr Sutherland: My other question is, you mention in your presentation about the sense of waste in government, the sense of not getting effective value for tax dollars or how tax dollars are spent. Certainly, all of us hear that a great deal, but when I look at the budget, the majority of the provincial budget is spent in Health, Education, Comsoc, and if you add Transportation in there, you're getting almost 75% of the provincial budget being provided in the essential services that most people say they have wanted.
The sense is that the vast majority of the money that government is spending is on providing services to people, services that many people feel are very important and essential, services that have come to help define us as Ontarians and Canadians. Yet we do seem to be having a growing sense that people want to still maintain the Canadian level of services but they'd like to have American tax rates to do that. Do you have any suggestions as to how you educate people to deal with that, to understand that the money is going to what they want, to services?
Mr Eastman: The high-profile things I was referring to were perhaps things that in themselves don't amount to a great deal of individual money. I'm talking about the high-profile things, things for instance that recently hit the press on providing home pay for somebody who's over in Denmark. Again, the total bucks on that aren't much, but that kind of thing kicks in in a hurry. When people get the numbers on the video that the province did on its NAFTA hearings, these are the things that are very high-profile and say, "Hey, government is wasting money."
There are also some much larger budgetary issues at stake, but I quite agree with you that on those larger things, there isn't an instantaneous solution for those. But you really have to be extremely vigilant about the oopsies that occur down in the departments that then hit the media.
Mr Norm Jamison (Norfolk): Thank you for your presentation. I apologize for being a little tardy in getting here, but those things happen.
I'm a little confused by some of the answers to the questions. I'm certainly not saying that your answers are correct or incorrect, but in our presentation from the Ministry of Finance, for an example, the advent of the GST showed clearly in graphic form the increased magnitude of the underground economy taking place almost simultaneously with the advent of the GST and the introduction of that legislation.
In our preliminary report, it indicates that small business people, for an example, the contractor that you were talking about earlier, has actually had his costs increase by 4% with the advent of that particular tax. Given the recessional times, talking to some small contractors myself, there's an overwhelming competitive situation out there, and not all of what's being taken in by individual contractors is being reported. It's become quite evident.
The other thing that I'd like to just touch on is the combining of the remittance of tax. The question is that certainly in traditional areas, the tax itself, the GST, invades what was provincial jurisdiction to some extent, but it also applies to every service; not just every purchase but every service that's paid for. This is also causing a strain in a roundabout way to the individual small business person who automatically pays 7% more on his hydro, his heat, whatever. So combining those taxes has always been the question, but once we've done that I guess provincial governments see it as an acceptance that the federal government take over what used to be an area of taxation for the provinces. Of course, we can't forget that the Liberal Party has indicated now that it plans on definitely changing the GST. That measure then would be redundant, and in fact we don't understand exactly what the change might in fact be.
I'd just like you to comment on those particular things that I've brought forward.
Mr Eastman: There's no question that the GST was part of the triggering mechanism. As I said before, the issue is, why was it made into such a triggering mechanism? Certainly, there were some parts of the economy that had not previously been paying the manufacturers' sales tax that now pay the GST. But if you compare the application of the GST to the application of the PST, I don't see a lot of difference except that they apply differently enough that there's a heck of a lot of additional paperwork burden that comes with that.
It is what came in as basically a discredited tax. If you look at the federal level, I cannot see good alternatives to the GST or another form of hidden value added tax at the federal level, which is even worse. The alternative to the GST is one that I suggested to the federal government, which is that, frankly, if you can't get the provinces to opt in, what you should consider is eliminating the GST and cutting back transfer payments to all of the provinces by an equivalent amount and letting them find their own revenue.
But the first law of economics is that you can't have more than there is. If you want the tax revenue, you have to figure out how to collect it and you have to figure out how you can sustain a healthy, economically viable economy that's going to pay it.
Mr Jamison: Just a quick question further: It's been indicated by some sources that the GST in its present form is one of the most costly taxes to actually bring in. There's some suggestion from some circles that it costs 20% of the total intake just to collect that particular tax. You dealt with perception, and we're dealing with the fact that perception sometimes becomes reality. When you deal with that, people are saying, "Why are we doing it that particular way when it costs 20% of the whole value of the intake on that tax just to administer the system?" This is something that people see and say, "Big government, big bureaucracy."
Mr Eastman: There was a major offset in the first year as people were paid to help set up their systems; I'm not sure what the current administrative fee is. But I'm not here to defend the GST. What I'm saying is that, hey, if you knock the heck out of the credibility of the system, you encourage people to try and find ways to escape it, to avoid the taxes, and that's what's happened here.
The Chair: Just to let the committee members know, we're going to go till 11, if that's agreeable to everyone. Then we have another presentation. We have four people who would like to pose questions: Mr Wilson, Mr Phillips, Mr Sutherland and Mr Cousens. You can see the time on the clock there, so would you judge yourselves accordingly.
Mr Gary Wilson (Kingston and The Islands): Thank you for your presentation. I just actually have a follow-up to Mr Sutherland's question that speaks to the fairness of the tax system, and that is, I found a bit of an imbalance in your presentation in that you don't say very much about the good use that taxes are put to and raise the possibility of whether that's a prospect.
1050
You talk about the high-profile items that are in the news, but why are they high-profile? Do we do enough as individuals and as businesses to praise the tax system and what it provides in the areas Mr Sutherland mentioned: health, education? In fact, these provide a good setting for business activities. That is, we have well-lighted streets, for instance, a good education system, a good health system.
The first item you mentioned in your list of the complaints about the tax system is that it's not fair. As you know, we have a Fair Tax Commission under way now. I just want to know what you think about how we can make the perception of the tax system what it is, that it provides a lot of good services that people want, and how we can make it fair, whether the Fair Tax Commission is a way to be going on that one.
Mr Eastman: Let me address the government spending part of that first. I think some of the most important things we do as a society we do through government, through public spending. That comes to our standards of health care, education, social safety net, policing, roads etc. The problem we've got is that most people in this province believe that they have had those things for a very long period of time but that they are now facing much higher tax rates for what appears to be a level of government service that has been heading down. Again, that may be perception rather than reality, but it is a widespread perception that they are paying more and receiving less for that.
In terms of the fairness of the system, the concept of the Fair Tax Commission has been great. I think it has suffered from a lot of teething problems and I'm not sure it's ever really gotten over them. One of the major problems has been that the average person out there has to understand that regardless of how much we tinker with the tax system, their average taxes aren't going to change much. Certainly, there are some real problems out there in the way some things are paid for. There are inherently a lot of problems with making the property taxes pay as much of the education burden as they do etc, but at the end of the day you wind up moving a lot of taxes around. If the average person thinks they are going to wind up paying less instead of paying what they do more fairly, they're mistaken. That message has not gotten out yet, and if that can come out of the Fair Tax Commission, it will have done a tremendous service to the province.
Mr Phillips: My view is that in the 1980s a lot of people thought the way they could survive was buying wholesale, so there was a big push to buy wholesale. I'm almost getting the feeling that tax evasion is the 1990s equivalent of buying wholesale. It seems to me it's becoming fairly pervasive. As I read your brief, on page 2 of your brief I get the sense in the middle of the page that many of your members who aren't participating in the underground economy seem to be on the edge of it. When they say everybody else is cheating or trying to, I guess the implication is that they're not but everybody else is.
The message I'm getting out of that middle page is quite a frightening one in some respects. If it's a big problem that's measured right now -- in my view, it's a $2-billion to $4-billion provincial issue right now -- if that's the case, this message here is that we're on the edge of it becoming an even bigger issue, kind of the 1990s equivalent of buying wholesale. Am I overinterpreting your comments here and am I being overly alarmist in terms of the message you're giving us here?
Mr Eastman: No, I think that's precisely correct. I think we really are at a point where, as bad as the problem appears to be, there is very much the danger that it can get substantially worse. I think some of the horses are out of the barn already, but by no means all. But unless we try to figure out what we're going to do about that door, there are going to be some more out there.
The Chair: Mr Sutherland.
Mr Sutherland: I'll pass.
The Chair: Mr Cousens.
Mr Cousens: One thought I had: Your report has enough to say on taxation and regulation that it touches a chord with what our caucus is doing with the Harris task force on taxation and regulation and reviewing the province, so I'd invite you to make a presentation to that to touch on some of these issues as they affect the paper from our own caucus that will flow from that. I hope you'll accept that as an invitation even now, to come and make your pitch on behalf of the chambers.
Mr Eastman: We'd be happy to do that for you and for the other caucuses.
Mr Cousens: Thank you very much. That's good.
Mrs Karen Haslam (Perth): We're talking so much about tax evasion. I found it very interesting when the ministry came to talk to us and some of the things they had to say. For instance, when they looked at the United States in particular, and I'm not saying Canada is like the United States, they found that 89% of the income was unreported by informal suppliers, 52% of the income was unreported by sole proprietors and 40% of income was unreported by small corporations. But you seem to say that your members always know somebody else who has not reported an income tax evasion. I also found it a very interesting comment from one of the gentlemen who said that if we lowered taxes by an overall 10%, the increase in revenue would only be 2%, so that the government would be at a loss of 8% for revenue.
We're looking at the underground economy, and it became very clear in the ministry's presentation that the underground economy was complex and was not solely as a result of the level of taxation. What other factors did you find in your study leading to the underground economy? I know we've looked at regulations. We've tried to reduce some of the regulations, reduce some of the paperwork. We've heard that loud and clear. Are there other factors that you have found?
Mr Couto: I think the only other major factor that came up over and over again was the paper burden, and again that ties into regulatory problems, especially for small members. You have to remember that small business is the only growing sector in this economy, and we estimate 77% of our members to be small business. When you take them away from doing what they do best, which is running their businesses, hopefully making them grow, hiring new people, when you take them away from that because they have to fill out forms, in effect we're depriving ourselves of revenues, of generation of wealth.
Mrs Haslam: I was listening to Minister Churley in the House the other day talking about the $50 fee and the fact that there are so many errors and missing pieces in the database now around corporations that I would think that it would be easier to watch tax evasion, to watch the profits and the people claiming income when you have a proper database. If the cost of that database is prohibitive and yet it helps the businesses in the long run, isn't it important that we do have a good database and we do have the proper information around corporations and income and some of the other issues around the paperwork?
Mr Couto: I think you have to look at it from the viewpoint of business persons who are quite frankly overburdened, I would say. It's not so much the $50 that they have to provide you, and we all understand that you need revenues in order to compile this kind of information, and the information is needed, as you say. There's no argument there. Again, we come back to perception, though. If people think, "Here's another $50 for more paperwork," whether it's needed or not doesn't enter into the equation for these people. They simply are saying, "Here's another form of taxation by the so-and-so government."
Mrs Haslam: Would one of your suggestions be, in a simplifying way, one form that includes many different aspects of the paper necessary?
1100
Mr Couto: I think anything that you can do to streamline the process --
Mrs Haslam: What about electronic and the new technologies that are available, and computerization? Would that assist businesses in keeping their records up to date as well as reporting to government?
Mr Couto: It would, but again you have to remember that a lot of the smaller members, even now, are not computerized and still do the old bookkeeping with the big book. We have to work towards that. We encourage our members to computerize, and certainly the government should look at that area and encourage it. If that cuts down on the costs and the time, we're all for it.
Mrs Haslam: In my riding, I think of farmers as small businessmen, because they are, and small businesswomen, because there are women in farming. I know there are courses available and a lot of the family farms and farm communities are going into computerization, because they realize it is an easier way. We're looking at two people running 150 to 300 acres. That's a large small business and that requires them not to just operate on a small counter; they're out in 100 acres of field. I feel computerization may be the way to go.
In your report you seem to indicate that the large corporations, by and large, were hard done by. I'm sorry I don't have the facts and figures, but I heard recently that there were a number of large corporations like the Coca-Cola company that didn't pay any taxes. You seem to indicate in your report that the large corporations have a hard row to hoe and therefore there are other ways of dealing with the problem.
Do you know of larger corporations that pay no income tax and do you think that's fair to your members in the chamber? Because I always look at the chamber as representing small business.
Mr Eastman: I'm glad you clarified the second time around that it was income taxes. I'm not sure of the specifics of that particular company. I do know that normally that wonderful status of having made profits but not paying any taxes on them either occurs as a result of either having had some terrible losses in previous years or they are in a very active investment program, which means that they are spending money creating jobs and that as a result there is no flow of cash out of the corporation. To the extent that money flows out of the companies into dividends, that is still taxed. Those companies are still paying corporate capital tax, property taxes etc. There's nobody out there getting a free tax ride that I'm aware of.
The Chair: Ms Haslam, I'm sorry; our time has expired and we do have another presentation to hear. I'd like to thank Mr Couto and Mr Eastman for making their presentation on behalf of the chamber of commerce before the committee today.
NON-SMOKERS' RIGHTS ASSOCIATION
The Chair: Our next presenters this morning are Garfield Mahood and David Sweanor, representing Non-Smokers' Rights Association. Please come forward and make yourselves comfortable. Whenever you are comfortable, please proceed with your presentation and identify yourselves for the committee members and Hansard.
Mr Garfield Mahood: Mr Chairman, members of the committee, my name is Garfield Mahood. I'm the executive director of the Non-Smokers' Rights Association. I'm here with my colleague David Sweanor, who is senior staff legal counsel for our organization. David is also an expert in issues of tobacco taxation. I'd like to expand on that introduction in just a moment.
We've certainly been involved in a significant way in tax policy issues in Canada. By way of introduction, David has been published extensively on tobacco taxation and smuggling issues. His manual on tobacco taxation has been translated into other languages and is used by health organizations around the world. His publications on this subject are considerable, and I think what he has to say will be enlightening.
I'll just begin with one little introductory comment. We call it the "poor me" analogy, and that is, if you can imagine any problem drug on the market, cocaine, for example, imagine a situation where someone came to the government and said with respect to cocaine: "We know who is producing it, we know when they're producing it, we know where they're producing it. We know when it's shipped out of the manufacturing facility, we know where it's going, we know the distributor who receives it. We know when the distributor receives it, where the distributor receives it, when the distributor passes it on to others, who ultimately put it into the system. We know where, when and how they do it."
With all of this information -- we know who's receiving it, where they're receiving it, when they're receiving it, how much they're paying for it -- at the end of the process, if a government stood by and reacted to that cocaine problem by saying, "Poor me. We don't know what to do. We simply haven't got any solutions," people would respond to that as an absurdity, and of course it is. If you take that and parallel that with what David will tell you about the tobacco issue and the smuggling issue, I think you'll gain some insight into what can be done from our perspective. David?
Mr David Sweanor: Tobacco taxes certainly have at least two very important purposes, one that you'd be paying a lot of attention to here, which is revenue. Tobacco taxes bring in close to $1 billion a year to the Ontario government right now, far more than what they used to bring in if you go back several years, before tax increases under the various governments.
But from a health standpoint, the important thing about tobacco taxes is that they affect the affordability of tobacco. What we've been able to do is reverse a trend. From 1950 to 1980, we allowed the real price of tobacco, adjusted for inflation, to fall while disposable incomes were going way up, and tobacco consumption skyrocketed. It was much higher than would ever have otherwise been the case, and we had a very high rate of smoking among kids. Teenagers are very price-sensitive.
If you look at what has happened in the last 10 years as prices have gone up, we've reduced adult per capita consumption by about 40%; we've reduced teenage per capita consumption by about 60%. It's far and away the most important measure that we've used to date in reducing tobacco use, and that's very important from a health standpoint, because as your chief medical officer reiterated again very recently, tobacco kills about 14,000 people a year here in Ontario.
The World Health Organization estimates that about 500,000 Canadians are going to die in the next decade as a direct result of tobacco use if we don't change current patterns of consumption. Some of the changes we've seen are certainly going to have an impact, they're having a big impact, and Canada's going to be used around the world as an example of the sort of things you can use to reduce tobacco use. It goes far beyond what we're doing specifically on taxes, but taxes are an integral part of that.
The issue about smuggling: I think we have to look at what has caused smuggling, and it isn't simply that our taxes are, as many people in the tobacco industry would claim, too high. That isn't the reason. Canada's taxes are not that far different from what you find in northern Europe. What we have is the ability to avoid the taxes. Why do we have a smuggling problem and the UK, for instance, does not, when their taxes are very similar to ours? In fact, with the budget in about a month, they might be higher than ours. The fact is we've been able to have a problem created by the very low taxes in the United States and the ability of people to exploit that situation.
To try to put some of that in perspective, there is something that I believe has been distributed that gives some background information. The very last page of that gives an idea of tax incidence in various countries around the world; that is, what percentage of the retail price of your typical pack of cigarettes is going to taxes. Ontario is below average for Canada, but we find that Canada is very much in the middle of what you'd find around the world. The United States is very low.
The page just before that shows taxes across Canada. Ontario's tobacco tax is actually the lowest in Canada. When you add on sales taxes, because they don't have that in Alberta, Alberta ends up with the dubious distinction of having the combined-total lowest taxes in Canada.
1110
But it's not just that our taxes are too high. As you have that stuff in front of you, the very first graph is important to look at because it shows the relationship between price and consumption; this is per capita consumption 15+. You can see that per capita consumption was basically on a plateau until prices, which is the bottom graph, went up. As price goes up, consumption goes down, a pretty simple equation.
Also, as prices go up and consumption goes down tax revenue goes way up, which is the second graph. Canadian governments were bringing in about $2 billion a year from tobacco taxes 10 years ago and over $7 billion last year.
The next graph, the one that's probably the most important for health organizations, is kids. Regular smoking among 15- to 19-year-olds was in excess of 40% in 1979; it was 16% by 1991, the most recent figures we have. All the research shows that kids are very price-sensitive.
We move from that into understanding the nature of the problem. I think a big part of the problem, and something that we're not addressing with anywhere near the seriousness that we have to, is the role of the tobacco industry itself. By this I mean the tobacco manufacturers.
I think we have to recognize that when we're dealing with this problem, with all the problems associated with tobacco use and what governments are trying to do for public health, but also what governments are doing in the area of smuggling, the tobacco manufacturers are not our friends. If we look at their vested interests, who is supplying the smuggled goods? Some of the tobacco industry's own estimates say that they are supplying over 95% of the tobacco smuggled into Canada.
Do they have an interest? It sure sounds like it. They're stimulating demand. There's more tobacco being consumed than otherwise would have been the case. They're making money from that. They're undermining tobacco control efforts in Canada to the extent they could force governments to back down on this. It would be tremendous for them and it would be a horrible tragedy for public health.
I think the tobacco industry has some complicity in what's been going on. If you look at the sorts of campaigns they've been running, what did they do after the 1991 federal budget put up tobacco taxes a lot? They ran ads saying, "Mike Wilson wants you to step outside for a cigarette," with a sign saying, "Welcome to the USA."
They have constantly exaggerated the size of the problem. We've caught them on this many times, but it's been creating this image that's it's a much bigger problem, growing much more rapidly. I think like anything else in the area of tax avoidance, if somebody tells you, "All your neighbours are doing it, everybody's doing it and everybody's getting away with it," does that get people thinking that they won't try or does it actually encourage people to do more?
I think the tobacco industry has also done a very good job of thwarting anti-smuggling measures, everything from killing the export tax that the federal government had implemented to running roughshod over ideas of marking tobacco products to the way that they package tobacco products for the export, ie, smuggling, market.
I believe the tobacco industry's argument that what we have to do is take our taxes to a US level is simply a non-starter. What that will do is reduce tax revenue and increase consumption. In fact, even if Ontario removed all of our taxes on tobacco, our price would still be higher than what it is in the United States today. The Ontario government would have given up about a billion dollars in revenue and would have stimulated consumption. According to the relationship between price and demand for tobacco, you'd expect at least a 15% to 20% increase in tobacco consumption and much more than that among our young people.
It would be a terrific example to all sorts of other tax avoiders that if you want to get rid of taxes, you just have to put an awful lot of pressure on government, it'll back down and it'll just find a billion dollars from some other taxpayers.
In taking reasonable steps to deal with this problem, we have to start off by recognizing the economics of smuggling. What has made it possible? We didn't have a smuggling problem until our prices were more than twice what they were in the United States. But the economics of smuggling are such that you have to sell the product at a price that consumers are willing to pay, which for any hot or illicit merchandise is always lower than the regular price.
The people who are selling it to them want to make a bigger margin. The margin increases according to the risk they're running. The distributors want a bigger margin than legal product people want to make because of the risk they're taking. You have to be able to sell it to those distributors at a price that allows you to make a profit big enough to justify your risk.
I think that we can deal with the economics of the smuggling all the way along. I think we can affect the price they have to pay for it when they buy it on the US side of the border. I think we can affect the size of the margin that a distributor, that the smugglers themselves want to make for bringing that into the country. We can affect the margin that a retailer, whether it's somebody in a store or with a duffle bag, wants to make, and we can certainly affect the price that people are willing to pay for it. We can take away a lot of the profits.
I think some of the things that would allow us to do this, just looking at what are reasonable steps to deal with this to try to preserve the revenue while simultaneously preserving the health gains that we've had, certainly there are some things that are more within the federal domain than Ontario's to stop the industry from playing these back-and-forth across-the-border games: you know, simply shipping the tobacco to the US side of the border, avoiding all taxes and recognizing exactly what's going to be happening to that product. It's been amazing to us that the industry has been allowed to get away with that for as long as it has.
But we can also take a lesson from other countries. Inside the package of materials we've handed out, there's a diagram of a tobacco product from Germany. That's a tax stamp. One of the lessons about getting rid of illegal markets or reducing illegal markets is to distinguish between legal and illegal. One of the taxi rides I had up from the Island Airport recently, the cab driver had a pack of illegal cigarettes. I asked him if I could have it, because I thought it would be great for demonstration purposes, and he was completely confused.
He said, "What do you mean?" I said, "Where did you get them?" He said: "What do you mean, `Where do you get them'? You get them in any store. I got these at a gas station." I said, "How much did you pay?" He said, "You know, $6, whatever it is." I said, "You paid $6 for illegal cigarettes?" He said, "What do you mean `illegal'?" He had no idea that what he bought didn't have taxes paid on it, because of the similarity of packaging between the legal and the illegal. Somebody makes a lot of money selling things like that. It gives them an incentive to get into the business.
We've had the same experience ourselves with going into stores. Right on the counter-top displays you have illegal cigarettes. But unless you know what you're looking for you don't realize what they are. In western Europe, where countries do have different tax rates and they have borders not that far different from the one we have with the United States, they've moved to putting tax-paid markings on the legal product to distinguish legal from illegal. The bigger the potential smuggling problem, the bigger the marking.
You don't go for the sort of things that the tobacco industry has been able to get away with in Ontario, that little yellow tear strip. When I talked to some folks with the treasury in the UK, they said that deserves an award for one of the least effective anti-smuggling measures ever devised. That is something that's incredibly easy to counterfeit, and as soon as you remove the strip there's absolutely no indication that taxes have been paid.
What is done in other countries and what we'd recommend for Ontario is to have that tax-paid marking on the package itself underneath the cellophane, and you want it prominent enough that the absence of that marking is immediately an indication of illegal goods. That makes it so that a consumer who doesn't want to promote crime isn't inadvertently promoting crime and buying that. Somebody who does feel like they want to rip everybody off is also going to want to rip off the person who's selling it to them and won't pay nearly as much, which reduces the profitability and makes it much easier to enforce the law.
If you're trying to say that they're illegal cigarettes, number one, the average consumer can't tell and, number two, cops aren't taking it very seriously. But if there was a measurement there that anybody looking at it -- you know, retailers tell us how people come to them wanting them to sell illegal cigarettes and say: "Everybody else is; you may as well. Your chance of getting caught is nil." If your chance of getting caught was greater, fewer people would be doing it. If the marking was right there, you'd know anybody could turn you in, including a legitimate retailer who doesn't like the competitors undercutting them. It helps to fight crime. Let's take something like that.
Provincial health messages would be another thing. That would be a good indication of whether or not Ontario's taxes have been paid: Is there an Ontario health message on those packages? Which gets into another whole area, which is that taxes in Ontario and elsewhere in this country on tobacco have been justified because of the extraordinary health problems associated with tobacco use, but we've had stronger statements of public health from our treasurers than we've had from our health departments.
In effect, what we have for an awful lot of people is taxation without explanation. We should be telling people why this product is taxed the way it is. We should be consistent. It's not surprising that people don't take us seriously on tax policies when you walk into a store and the stuff is displayed on the counter tops like candy, when it's glossy packaging, it's sold in small packages that are appealing to children, it's promoted in wonderful promotional materials, it's sold by health professionals such as pharmacists. We're giving a really inconsistent message.
I think if we want to have our laws enforced on taxes, we should show the public why these are important. Let people know what the basis is and I think we'll have greater enforcement of our existing laws. We have to show a consistent position.
1120
Finally, the thing that probably would have the greatest impact, both short-term and long-term, is to work with adjoining states, to work with the United States on this issue. As you may know, Bill Clinton has already proposed an increase of 75 cents US a pack to finance his health care reform. That's great news for us. It's great news not only for reducing smuggling by putting up the price on the US side of the border, but, heck, they'll get health care in the United States and you have fewer people sneaking across here to try to abuse our system. We win both ways: We save on health care and we reduce crime.
The tobacco industry is totally misrepresenting the situation in Canada in Washington. Canada is not responding. If the feds won't, maybe there's something Ontario can do in terms of information; more importantly, even with our immediately adjoining border states. New York increased its taxes this year by another 17 cents a pack. It went through very well; the government was very pleased with it. But they had very little information from Canada about what they could do, how much higher they could go.
In Michigan a couple of weeks ago I testified and had the joy of sitting later watching representatives of the tobacco manufacturers completely misrepresent what's happening on this side of the border without the ability to respond; sitting and thinking, wouldn't it be nice if there was a representative of, say, the Ontario government here who could simply pass around a business card and say, "If you want to really hear what's happening in Ontario, we're very willing to tell you."
Meanwhile, the Governor of Michigan just this week has come out in favour of a tax increase of at least 50 cents US a pack. That's significant stuff. That would reduce the problems we have with cross-border shopping and smuggling. We shouldn't leave them hanging there. We should be concerned when we see advisers to US governments, whether state or federal, accept the tobacco industry line that taxes aren't affecting consumption in Canada, that they haven't worked, that they're not reducing consumption etc. The evidence is completely to the contrary.
I think there's a lot we can do to work with those jurisdictions. It's not a matter of us going in and roughing them up and telling them, "Do exactly what we want." It's a matter that they want to replicate what we're doing. They've seen the results: Teenage consumption of tobacco products in the United States hasn't fallen in the last 10 years. It's US research on which we based our approach when we increased taxes and saw the decline here. They want to do what we've done. Let's give them the information. Let's at least dispel inaccurate information they have.
The only other advice I have, because I do a lot of work in the United States, is that I've found in the last few weeks that baseball jokes don't go over very well any more if you're from Ontario. That's the only advice I give.
That's our testimony.
The Chair: Thank you very much for making your presentation. We have about half an hour for questions. We'll start with Mr Cousens.
Mr Cousens: Maybe you could elaborate on the hearings going on in Washington and give us a sense of two or three elements: (1) confirm again that there's been no representation by Canadians on this issue -- I find that somewhat surprising -- and (2) the kind of inaccuracies you're mentioning from the tobacco companies, if you have any specific types of statements they're making. You've said generally that they're saying things are okay up here. I'd like to have more evidence to support what you just said.
Mr Sweanor: If we start off with what's going on in the United States, basically they're looking for ways to promote health and to raise money, which is exactly what had happened here. Tobacco taxes happen to be one area where, as public opinion polls in the States show, you end up in exactly the situation we have here. It's win-win-win: You save a lot of lives, you raise a lot of money, and it's popular. When you're looking at things like funding health care reform, about 80% of Americans support large tobacco tax increases as a way of doing that.
They've seen, as I said, the same problem we've had here, where their taxes have actually fallen in real terms. If you look at what their taxes were in the early 1950s in the United States and simply adjust for inflation, they're much lower now than they were then, even though during that time we found out all the health information. If you look at tax incidence in the United States, the percentage of the retail price that goes to taxes, from 1955 to 1991 you can see this downward trend; it's been chopped in half. That's part of the interest in what they're doing. They have to raise billions of dollars. In the case of Michigan, you may know that the property tax basis they use for funding their education system was removed. The government has to find, I believe, $4 billion a year and it's hard to find that sort of money, as you guys all know.
One of the obvious things to do in looking at a tax system is that for most of the things we want to do -- and it's the same thinking that's going on in Washington -- most of the ways you raise taxes, if not all, affect behaviour. If you increase income taxes, you reduce the incentive for people to work or at least to report income. If you raise taxes on interest income, people might save less for their kids' education. If you increase capital gains taxes, people might invest less money in the economy. You raise consumption taxes and people consume less. In the case of tobacco, that's exactly what you want to do, so that's where they're headed.
In terms of information from Canada, we get calls -- I believe in the last year it's been from over 40 states, everything from health organizations to governors' offices, wanting information on what's happening in Canada, because they've heard of the stuff we've produced. They've seen things in the US media where we do some amount of work.
We don't have people we can refer them to inside government, the federal health department, whatever. We've been trying to get External Affairs to assist with what's going on in Washington because of how important that is to Canada. We have not seen results of that. We have seen testimony from some of Clinton's officials that indicate they have been briefed from the tobacco industry and probably not from anybody to dispel some of that nonsense.
In terms of some of the things the tobacco industry is saying, they will say that tobacco taxes do not affect consumption. That is very interesting for anybody to say, that nobody is price-responsive. The sort of comments that are being made in the United States are very similar to the sort of comments we've seen being made here in Canada. For instance, the current president of the Canadian Tobacco Manufacturers' Council, the lobby group here, is quoted in the Canadian Tobacco Grower this year as saying, "It is not the case that increasing price leads to a decrease in consumption." If you've heard from them or will hear from them or ask them, they will now tell you that there is no relationship between price and demand.
There's the sort of information you can see in annual reports from tobacco companies. The latest annual report from Imasco, our biggest tobacco company, says: "The smuggling problem is due solely to the very high level of tobacco taxes in Canada. The rationale for these taxes is that they discourage smoking while generating substantial government revenues. However, there is no evidence that the policy has had a measurable effect on the incidence of smoking by Canadians." That's the sort of stuff they say here; that's the sort of stuff they're saying in the United States. It's 180 degrees different from what these same companies were saying in their same annual reports over the last 10 years, and I can read extracts from them. But of course they were acknowledging the obvious in the past, which is that price does affect consumption, and taxes are having the biggest single impact on what's going on.
What happened, in my view, looking at the documents they've submitted to governments over time, is that they used to complain to governments, "If you put up price, consumption will fall and that will be awful because we might have to lay off workers etc." They pushed that idea: "You want to help this industry. Don't kill the goose that lays the golden eggs. Your revenue might even fall because consumption will fall so much." The government could do its own analysis of the economics, and it found the relationship between price and demand was such that -- we're dealing with an inelastic curve here -- governments can do much better from selling fewer cigarettes, exactly as is indicated in the graph, plus the government wants to reduce tobacco use. The government's saying that in Canada 40,000 people a year are dying from this stuff. From a pure humanitarian standpoint, we want to deal with that. We have a lot of kids getting addicted to it; that's when people get addicted to tobacco, as kids. This is something that will reduce that problem.
Even from a pure economic standpoint, as long as people stay alive and stay healthy, one way or the other, we get to tax them; once they die, we don't tax them any more. It's in everybody's best interests to have a healthy population that lives longer. Somebody dying of a coronary at age 45 gives us a heck of a lot less revenue to finance our country or our province than somebody who is kind enough to stick around for a lot longer and earn more money and get taxed.
Those are some of the things. The same sort of statements that are being said here are being said there. Those are the statements we're hearing, the sort of statements we're having to respond to. At some points it's right to the area of humour when you compare what the tobacco industry is saying now, that taxes don't affect consumption, and what they said until very recently, when they realized they had to completely revamp their strategy. I don't think accuracy is a hallmark of this industry.
1130
The previous head of the tobacco manufacturers' council, Bill Neville, in front of a House of Commons committee in 1991 said: "Let me make it clear. There's no use kidding anyone on this. It works. That is, taxes do impact on consumption." Well, they did then, but there's absolutely no evidence now, according to the tobacco industry. That's the sort of nonsense, the sort of thing. When they're saying that tobacco consumption has not fallen any more rapidly in Canada than in the United States, their own figures show that's not true. But unless there's somebody there to point out their figures, it's the usual problem: As you know as decision-makers, you can only make as good a decision as the information available to you allows.
Mr Mahood: David, if I may, in response to this, as a follow-up to the committee, I will send over a copy of material on the industry's sales deception. Part of the backup for this is a report entitled The False Dilemma. You may have seen this. This report was the subject of a lead editorial in the Globe and Mail the day after it was released in Ottawa.
The False Dilemma was written and endorsed by seven of the leading economists in the country, including Rick Harris and Pierre Fortin, two giants in economics in Canada. In The False Dilemma, it makes it very clear that price has had a phenomenal impact on tobacco consumption in Canada. It refers to a study by Burns Fry. I think it attributes in excess of 90% of the fall in consumption in Canada to price through increased taxes. Other economists have come in and suggested it's perhaps not that high but it is very, very high. Without question it is the single most important factor in the decline in consumption in Canada.
I must tell you, when you compare our performance in Canada in public health, in other words, when you see our falls in tobacco consumption in Canada, twice the rate of the decline in the United States, and when the single most important factor in that is tobacco taxation, there's no question that that translates into reductions in the tens of thousands of deaths in Canada in the future as a result of our tax policy. You simply cannot abandon that.
What really shocks me is that I have yet to hear a single politician in this country get up and say in front of cameras or in a Legislature or in the House of Commons: "Look, what the tobacco industry is asking us to do is to roll back taxes to US levels. That would probably increase the number of smokers in the market by a million. That will probably lead to over 300,000 unnecessary deaths in the future. It will decrease our revenues, probably in the neighbourhood of $5 billion, in this country. That simply is a non-option."
What does this industry expect of the Canadian people in terms of that kind of deception? That's not what we want for Canadians. There have to be other solutions. We don't see politicians, Health ministers or anyone else going forward and telling people what the costs are on this.
Here in Ontario there are several things on the agenda that would have a huge favourable impact on this problem. The provincial health community is asking this province to implement plain packs in its tobacco legislation. Plain packs would be the single most important health initiative they could take, other than price, and plain packs have been endorsed by every editorial of every major newspaper in this province. There's strong support for it, even among smokers, in the public opinion polls. Plain packs would help differentiate the smuggled package from the domestically sold duty-paid package. We don't see the signs of that.
Licensing of retailers, again for the Ontario tobacco act: If you lost your licence for selling a smuggled package, you can bet your bottom dollar they're not going to risk that, so you cut off that whole source of smuggled tobacco. Licensing of retailers is absolutely critical.
David mentioned provincial health warnings. Under the federal Tobacco Products Control Act, one of the clauses in that legislation almost invites the province to put better warnings on, to rise above the minimal warning standards set by the federal warning system. When you put provincial health warnings on a cigarette package, it will be very easy to differentiate. Even though that invitation is there, we still haven't seen anybody get up and say, "We're going to put provincial health warnings on these packages and we're going to bring forward that Ontario tobacco act."
So there are major things the province can do to impact on this, one of which is to tell people what the options are.
Mr Jamison: That's an interesting presentation. The statements that you made I believe are debatable in some areas. I should preface my comments by indicating to you that I represent the number one tobacco-growing riding in all of Ontario, probably in all of Canada, and I'd have to make a sad statement.
After meeting with Garfield and a number of your representatives a while back, my suggestion was that it wouldn't hurt from time to time on this issue -- it's very divisive as far as smokers versus non-smokers versus communities and so forth. There was a strong indication at the beginning of your presentation that you relate tobacco directly to cocaine, and by virtue of that, I would take it that you would consider making tobacco illegal, period, if you had your way.
The problem we always seem to miss on the two ends of this is that there is a certain economy in southwestern Ontario that seems to never be mentioned in that light. There's a certain group of people, farm families, who make their living from growing a legal product called tobacco: not illegal, legal. The impact of taxation on those communities has never been weighed in properly, although there's an assessment of stakeholders being done right now to that end.
The health issue I don't think anyone can argue. I believe there's a real health issue there. This government has chosen to focus on youth and education.
I believe your figures are based on legal sales of tobacco. The illegal sales of tobacco are, quite frankly, not properly measurable at this point in time. We all have an idea about what those are, and I believe they may reflect somewhat on the figures presented here today.
The other point I'd like to make is that when we talk about European communities and the types of things that have happened, the taxation levels are much more in line in those European communities than they are between Canada and the United States. Those taxation levels, being much more similar in their amounts, make the problem much easier to deal with.
No one can deny that the difference in price between Canada and the US has fuelled an underground economy in this area that simply sees revenues on the government's part fall dramatically from the levels that they would be. At the same time, the reduction in levels of usage of the product are questionable because they are not actually able to be accounted for at this point.
1140
If in fact you were to have your suggestions go ahead full force -- we're talking about fairness around the board -- what would happen and what responsibility would federal and provincial governments have in declaring it an illegal product, and what then would stop smokers in this province from smoking smuggled Marlboros? That's the kind of question I have surrounding your report. But the one thing that really concerns me -- and I talked to you directly in my office about this -- is that if in fact the product were made illegal or if that were the end result or the end push in this area -- and I don't consider it to be humorous. You can sit there and smile; I have people who depend on this in my own riding, who depend on growing that product, and I don't think it's that funny when they go out of business.
Mr Sweanor: We're not laughing about those people, I assure you.
Mr Jamison: Okay. But I say to you, what kind of difference in tax doesn't promote smuggling? Possibly the effort on the issue should be centred, at this point, south of the border, because that is the real problem. When are we going to start talking about the communities that are affected? I've never heard that from you.
Mr Mahood: Mr Jamison, through the Chair, you'll recall that in your office I mentioned to you that my home town is in the centre of tobacco country. You will recall that we did give you an answer, and perhaps David's response was because he felt your questions were a bit provocative. The reason I say that is because we explained to you in your office that making the product illegal is not the end of any health organization in this country. It is not anybody's policy; it's no one's desire. You cannot make a product illegal. Clearly it would make a lot of sense to make it illegal when you have 40,000 deaths a year, but if you can't do that, if that's impractical, if it's on nobody's agenda, then what you're doing is setting up a straw man. It's very provocative, and perhaps we can -- I will try not to be --
Mr Jamison: Sorry, but I'm referring to your description at the beginning of your presentation, and from that I take it that you compare that with cocaine and that any government would --
Mr Mahood: The comparison is that cocaine kills less than 200 people in this country every year and it's considered to be a very serious problem when it's brought into this country. It's a law enforcement problem. In terms of damage to health, tobacco swamps -- dwarfs -- the problem of illicit drugs. So when you make a comparison, the comparison is in the law enforcement end of the comparison, and in terms of law enforcement, when we know everything about the system of smuggling involving tobacco -- where, when, why and how -- and we still claim we can't do it, that's an absurdity.
It's an absurdity, frankly, to suggest that somehow or other, when we've got 13,000 deaths a year in this province due to this industry's products, we should protect 1,000 tobacco farms in Ontario for the purposes of allowing the promotion of the epidemic to continue. If we really believe that, then let's sell more tobacco, let's promote it through our government programs.
Mr Jamison: You've accused me of being provocative; you're being provocative.
The Chair: Order. I'm sorry; I'm going to have to interject here. The purpose of our committee hearings is the underground economy and not the health issues of tobacco smoking. I have let it go on a little longer than I should have, and I regret that. Mr Sutherland.
Mr Mahood: But there are good answers, Mr Chairman, on the underground economy, and we'll restrict --
Mr Sutherland: My question is twofold. I think one of the reasons your group is here today is to justify why we have higher taxes on tobacco. People understand some of the health arguments, but at some point I think everyone's agreed there's a saturation point as to how much the price of tobacco is going to discourage people from smoking. I think there are merits in that. I think most of the people who have quit have done that because of the price, and now you're into hard-core smokers who quite frankly are going to be willing to pay whatever.
We have a smuggling problem. You've talked about the comparison of real inflation. People's purchasing power, because they've been unemployed or whatever, has declined due to this recession. Tobacco taxes haven't increased in the last two years, but we have a very serious smuggling problem. It's not just the cigarettes, as we're hearing evidence, though. Those networks for the cigarettes are creating other networks for other types of products, including illegal products.
I guess in a nutshell what we're looking at is, how do you say to that average smoking person out there who may have seen his wages go down or what have you, who is a smoker, and to everyone out there -- how do you, say, find that balance? Yes, there are health costs, but we know lots of people are injured or maimed or killed on our highways too every year, not maybe to the same degree, but a large number of people are injured every year on our highways as well. How do we justify those tax rates at that level and how do we reinforce people's faith in the system to stop being involved in an underground economy, particularly in the cigarette area?
Mr Sweanor: If I can deal with some of those points, in terms of a tax saturation point, all the econometric evidence that's available worldwide would indicate that we're nowhere near the tax level that, if we were in Ireland, we'd have to worry about it, for instance. What we're looking at here is the whole issue of affordability.
Mr Sutherland: But we're not in Ireland.
Mr Sweanor: That's right, but in terms of saturation, would you get more people to quit? Ireland is a good example of taxes that are quite similar to our own, and per capita income is much lower than what you'd experience. It must be less than half of what you'd find in Ontario. It's still been an effective measure for the government of Ireland.
When we're not in Ireland, from a health standpoint alone there would be no reason to say you shouldn't have higher taxes. What you're looking at is the question of differences across the border. To pick up on your comments and what Mr Jamison is talking about, what do you do when you've got a big difference? That's our big problem. Were our border with New Zealand or any of the northern European countries, we wouldn't have a problem. Our border happens to be with governments that have the lowest tax levels by far of any major industrialized country.
One of the lessons is from Europe. Why is there a similarity in tax levels? The difference between the UK and some of the southern European countries had been as great as what we're experiencing now. What did the UK do? The UK, through its government, not through health organizations, put together information on the role of taxes in terms of health and in terms of revenue, had a symposium and brought in members of these other communities. The government was the source of that information.
I'm very proud of the work that we've done and that our organization has done. We don't have nearly the credibility that, say, the government of Ontario would have in giving information to these jurisdictions. If you invite in representatives -- and we've heard from every single border state in the United States, naturally all the ones bordering on Ontario -- they're interested. Many of them are increasing their taxes. They need more information. Can the Ontario government do what the UK did that lowers that tax gap?
With Michigan, again, one of the proposals there would be an ad valorem tax, where the tax would be equivalent to 66% of the wholesale price, which includes federal tax. It would be pegged to currently be 75 cents a pack, which is 50 cents higher than what it is today. If Clinton comes through with this 75-cent increase, that automatically increases the state tax by an additional 50 cents.
Mr Sutherland: So your suggestion is to wait for the American states to increase theirs.
Mr Sweanor: No. Maybe I'm not making my point. Help them. They're looking for the information. When the Americans are looking for things to do to reform their health care and they come asking Canadians, I think it's nice and neighbourly of us to help out. When they're looking for information on tobacco taxes and they're asking for information, I think it would be nice and neighbourly to help out. We simply cannot keep up with the demand for information or the questions from the United States, but we're not that big an organization. We don't have the resources. Governments do.
The UK has shown what you can do. It's no coincidence that France -- France and the UK used to have very different tax rates -- has seen very significant increases in tobacco taxes in the last year. I don't think that was independent of the action that the neighbouring jurisdiction was taking.
I think the experience we've had is very important for those jurisdictions, but I think the key point we have to look at, in terms of what we can do right here in our own backyard, I think you make a very valid point to say there are some people who are getting hit really hard. They may be hard-core smokers. There's evidence that some people, because of physiology, get addicted. It's very hard to break that addiction. What are we doing for them? That gets back to the consistency.
1150
The government has justified these taxes by saying that this is by far and away our leading cause of ill health and premature death. It kills 10 times as many people as are killed on our streets and in car accidents. That's why we're taxing it, and you turn to those people and you say: "What sort of health information is the government giving you? What sort of help are they giving you to quit smoking? What sort of consistent message are they giving you? What are they doing to keep your kids out of that market?"
I think those are some of the other measures we can take that affect that underground economy. If people understand the nature of what we're dealing with, there's an awful lot we can do right here.
Mr Phillips: I appreciate the presentation. I think firstly that the tobacco issue is kind of the metaphor for the underground economy. I happen to think it's a very small part of the underground economy, but as I say, it's become the metaphor and whenever we discuss the underground economy people hardly get beyond tobacco. We had a witness here the other day who said that in his judgement the biggest loss of revenue in the underground economy is personal income tax, and I believe that.
The reason for saying all this is that this study is trying focus on an issue of the underground economy. I appreciate that there are a lot of other issues around tobacco that are very valid, and that's a very important debate, but I'm trying to be realistic with how much we can achieve.
I think there are a couple of givens in this tobacco exercise. The US price for the foreseeable future will be significantly lower than the Ontario price. I personally hope Clinton does what he says he's going to do, but I think we should deal with that.
Secondly, personally, the thought of visualizing Ontario prices on tobacco going down is unrealistic, but that's my own judgement. I'm looking to you for advice on how we deal with the big issue in tobacco, which I think is the product coming back into Canada or coming into Canada. I can't remember whether in your presentation you talked about the export tax or not. Maybe you did and I missed it.
I'd appreciate your comment on that, your comment on distinguishing the packaging. I think you said to make the Canadian package distinctive and I'd like your comment on doing the reverse and that is making the export package distinctive.
Thirdly, I'd like your comment on, if we do all that, does all that simply mean that the US-manufactured product would replace the Canadian-manufactured product that comes and goes? What I'm asking for is help on dealing with something that I think we can handle. There's a big debate that we've had today about smoking, whether it should be outlawed and all those things. I can't personally visualize us ending up dealing with that, with this committee having its much broader and different mandate. Perhaps you could help me on those three specific questions.
Mr Mahood: Those are excellent questions and David will deal with them.
Mr Sweanor: In terms of the export tax, I think all indications are that it was working. It was killed prematurely after eight weeks. The idea was that the vast majority of all the tobacco smuggled into Canada originates from here. Canadian tobacco is different from American tobacco and people are very brand loyal. In fact, one of the reports from the tobacco industry this year came out with the figure that 95%-plus of all the tobacco smuggled into Canada originated from them.
We saw the export tax as being a short-term solution in that it buys us time, because what you do is you slow down the ability of the industry to simply play the back and forth across the border game. I was very surprised that our tobacco companies would do that because they do want to play the role of legitimate industries. They don't want to be seen as publicly trying to thwart government tax and health objectives. But they were involved in that and shipping vast quantities to the US side of the border.
The role of the export tax was to get away from that tax-exempt status for anything that's shipped out of the country, because virtually all our exports at that time were being consumed by Canadians, either Canadians vacationing in the United States or Canadians once the stuff was smuggled back in, and the vast majority of it was apparently being smuggled back in. It puts up the price at which it goes south of the border, which puts up the price to the smugglers, which reduces their profitability, which interferes with smuggling because they're in it to make money.
The reason we saw it as a short-term solution is that we believe the tobacco companies would very well look at setting up facilities in the United States to manufacture the product. They do that at their risk, because governments can do a lot of other things to make life very difficult for the tobacco manufacturers. But if we saw that as a legitimate risk, that the tobacco industry would risk their future viability in this country by doing something that provocative. Then an export tax for a period of, say, six months would buy time for the government to implement other measures; it reduces the problem.
In terms of the marking of the product, do you mark the legal or the illegal? The agreement that our previous federal government made with the tobacco industry was that they would mark the product as being shipped out of Canada so that when it came back in you'd be able to see the little thing saying, "Not for sale in Canada." There are two problems with that. The first is that if you look at the packages, the little marking is so innocuous that people don't see it. The second is that every other country we're aware of anywhere in the world that tries to deal with the problem recognizes that by definition you have control over the packaging of the legal product; you don't have control over the packaging of the illegal.
If you have something like a tax stamp that said, "Ontario tax paid," you can have that in watermarked paper that the tobacco companies have to buy from the government to affix to the package at the time of manufacture. By definition, you've got every legal product covered. Anything that doesn't have that is easy to discern. If you try to mark the illegal product, say, "Everything you're shipping out of Canada, we want something on it," you're just giving them the other incentive to produce in their facilities in the United States.
When we look at the European countries, they're not saying, "We think this might become illegal." They're saying, "This is legal," because that's the part of the market you have control over if you want to distinguish between the two. That's the same role that health warnings would play in distinguishing between legal and illegal. Mark the one that you know you have control over.
On the question of whether the product would end up being replaced by a US product, if we could eliminate the smuggling of the cigarettes produced by the Canadian companies that are shipped to the US, that smugglers bring right back into the county, we would indeed see an increase in the smuggling of other products the same as if we were to say that we know the source of 95% of some other type of illegal activity, whether it's 95% of a particular drug being smuggled into the country or who is responsible for 95% of the protection rackets going on in a particular city. We would know that if you eliminate that 95%, chances are that the 5% is going to grow. How rapidly will it grow from 5% to 100%? How high will it go? Will it become 30% of our current problem? Will it become 40%? Will it take five years? Will it take more? Those are the questions.
I think what we can do is eliminate much of the problem we have now, which again buys us time while these other things are happening, because I think you're right: For the foreseeable future, if we talk about the next few months, US prices are still going to be substantially lower than ours. If Clinton's program comes through, it's a question of how soon. How much time do we need? Are we talking about a year or about two years? If we look at it strategically, there are a lot of things that we can do that help us prevent the problem from growing or reduce the problem while the long-term solution, that equalization of taxes, takes place.
Those are the sorts of things we would be looking at doing, and that's why it's important to look at that export situation.
Other countries have taken novel approaches. Italy, I believe, has said to tobacco companies, "If we find more than a certain portion of your product coming into the country illegally, we'll ban you from selling it legally for a while," recognizing that the vast majority of their sales still come from legal products. It's a way of playing hardball with the industry.
But the markings on the product, the "tax paid" markings, the health messages, the consistent message going to the public about why these taxes are in place in the action to see US taxes go up, all of those things make good strategic sense about dealing with the problem without taking the one solution the tobacco manufacturers offer, which I agree with you is absurd. We can't at this point say, "We will invite a major public health catastrophe and give up a billion dollars a year in revenue." We don't need the public health problem, and we do need the revenue.
Mr Mahood: Mr Phillips, if I can just add to that, the available evidence is that the 5% David referred to would not grow all that quickly. First of all, Canadians do not like American tobacco and consequently the affinity isn't there for that product. The second thing is that with the Tobacco Products Control Act the industry has found it very difficult to promote new brand launches or in fact new brands. The American brands are not that well known in Canada and consequently that segment of the market is not going to grow that quickly.
Thirdly, if you're effective in your process of stopping smuggling, and these combination of measures can do that, one of the things we found out was that when the American companies had to play by Canadian rules in their marketing and distribution, two of the three American companies withdrew from the legal market. They, for example, did not want to see a package of Camel cigarettes sold in Canada with those great big Canadian health warnings which are planned. They didn't want to have someone hold those packages up in a congressional committee in the United States, make the comparison between how Canadians are warned and how Americans are warned, and have people say, "Aren't American kids worth as much as Canadian kids?" So they withdrew.
What I'm suggesting is that there are a number of factors on the scene which will prevent that 5% growing at a very rapid rate. There is no question, when the product is coming in from the United States there's a bigger incentive for Canadians to get real tobacco control measures out and into the public domain, because we don't need that bleed of money going into the United States.
For a number of reasons, the tobacco industry, if governments act responsibly and if health ministers and treasurers get forward and tell the public, speak publicly about what the options are, I think major things can be done to deal with this problem without caving in to the tobacco industry.
You have to remember the New Brunswick experience. They lowered tobacco taxes in New Brunswick and it did not have the effect of stopping smuggling at all. You'd have to lower them to such an extent that in fact you'd punish the province severely with respect to revenues and that's something the province can't afford.
What we have to do is either learn to play the game effectively with the industry -- in other words, we have to learn to bring the good public policy forward -- or we're going to continue to get creamed in the press. But rolling tobacco taxes back simply is a non-starter, as David said; it's a non-option and it would just have very undesirable effects.
The Chair: Thank you. The clerk was very successful in making sure there was no loud machinery outside the committee room until noon and you can see that at noon exactly they started. However, Ms Haslam said she has a 13-word question she would like to ask you.
Mrs Haslam: I have a little bit of comment beforehand. I can understand the concern of my colleague. If you were here discussing the smuggling of pork, I would be as upset as he may be because pork is a very important industry in my own riding.
However, given what you've said about New Brunswick, and given what the ministry has said, it also means that if Ontario were to reduce its tobacco tax to zero, or something approximating zero, it may well be that smuggling cigarettes would still remain profitable.
My question is: If Clinton raises the taxes on the American cigarette side, if we bring in better packaging to show the legal entity, given those two issues, do you feel that would address the smuggling problem we have in the province? Briefly, because I'm the only one who's going to be left here listening if everybody leaves.
Mr Mahood: Very briefly, and then David will give you the better answer. The fact is that when the export tax was introduced, the exports in this country, which were largely the product to be smuggled back, dropped like a stone. Ross Howard did the big exposé in the Globe and Mail and showed how it dropped just like a stone. What we're saying is that when the Clinton increase goes in, if that increase went in in Michigan, there's no question that would have as big an impact, or bigger, than the export tax. So some of those things are going to happen.
Mr Sweanor: It's the combination of the things. Certainly Clinton's tax increase all by itself would have a dramatic impact, because what we're looking at for the profitability of smuggling isn't the absolute price difference between two jurisdictions; it's the ability to buy in one jurisdiction, cover all the costs of marketing it and sell it for a profit.
Mrs Haslam: Yes, and that's my question. Given Clinton raising it, given the States raising it, given additional health warnings on packages in legislation that would be proposed here, given those three or four factors, would we see, in your estimation, a reduction in the smuggling of the product?
Mr Sweanor: In my view, if you did those things plus enforcement mechanisms in terms of taking the problem --
Mrs Haslam: Licensing; I understand that too, yes.
Mr Sweanor: With licensing, the significant penalties for the big-time smugglers, I believe we would see an end to smuggling as a problem as we know it.
Mrs Haslam: An end to the smuggling of this particular product as we know it.
Mr Sweanor: That's right.
The Chair: Mr Mahood and Mr Sweanor, thank you very much for presenting before the committee this morning.
Mr Mahood: Thank you. If anyone wants copies of The False Dilemma, I'd be more than pleased to give copies.
The Chair: Thank you very much. This committee stands adjourned until 3:30 this afternoon.
The committee recessed from 1205 to 1535.
ONTARIO HOME BUILDERS' ASSOCIATION
The Chair: The standing committee on finance and economics will come to order. This afternoon our first presenters are Stephen Kaiser and Phil McColeman, representing the Ontario Home Builders' Association. Please come forward. Make yourselves comfortable. Welcome to the committee. When you're ready, please proceed with your presentation. Also, could you identify yourselves for the committee members and the purposes of Hansard.
Mr Stephen Kaiser: Mr Chairman, members of the committee, good afternoon and thank you for inviting us here to talk about the extent and impact of the underground economy. I understand that we have 15 minutes to give our presentation and then half an hour for questions.
My name is Stephen Kaiser. I am a home builder in the Niagara region and president of the Ontario Home Builders' Association. With me today is Phil McColeman. Phil is a renovation contractor from Brantford and the immediate past president of the OHBA.
As a preface to my remarks, I should point out that our industry is in many respects uniquely qualified to talk about underground economies. The most obvious qualification is the fact that the underground operators are competing with us. We know how pervasive the black market has become. In a couple of minutes, Phil will have more to say about this. We also know about the cost savings that are available in the underground economy.
The other thing that qualifies us is that we have to deal on a firsthand basis with the conditions that create and encourage underground activity.
We have felt the full brunt of this economic depression. We have seen construction activity cut in half. We have seen bankruptcies and layoffs. We have been left with houses after customers have walked away from deposits. We have been left with invoices after renovation customers have refused to pay for work we have done.
All this has happened and continues happening today while the government raises taxes, while it piles on more and more regulation and while it pursues senseless policies.
Let's look at taxes. Tax hikes do two things: They increase the cost of your product and they reduce the buying power of your customer. Increasing taxes in the presence of an underground economy is like throwing gasoline on a fire.
The same thing goes for regulation. Last summer, changes to the building code added thousands of dollars to the cost of a house. These thousands were added when the buyers who remain are predominantly in the lower end of the market.
These tax hikes and additional regulations are bad enough, but they have been combined with something else that compounds the damage. They go along with misguided policies and apparent disregard for the health of our industry. It is this combination that really invites an exodus into the underground.
Think of what our industry has had to contend with in just over the past three years. Tougher rent control legislation has killed construction of new rental stock and renovation of existing stock. An aggressive non-profit housing program has funnelled obscene subsidies into product that competes with market housing. In each of these budgets, the government has vastly overstated the health of our industry.
The underground economy is about economic necessity. We have a saying in the industry that every time a plant lays off a thousand workers, there are a thousand new renovators and home builders. That is on the supply side of the equation. On the demand side, people have had their buying power reduced, so they are looking for bargains.
I should point out that these savings can be substantial. Paying cash so that a worker does not have to claim income lowers cost. Evading all the UIC, CPP, employer health tax and so on gets costs even lower. What is more, evading all or part of the GST and PST brings the cost even lower still. Some renovators, for example, find the black market undercuts them by 40% to 50%.
The underground economy goes beyond economic necessity. It also has important social and political dimensions. In some cases, giving the laid-off person an odd job is a way to give a helping hand, and yet in other cases buying or selling on the black market is a political statement about taxes, regulation and government policies.
Most political commentators will tell you that people vote with their wallets. Well, this is an election that does not need a ballot box. Now I'll turn it over to Phil, who will tell you how the vote is running.
Mr Phil McColeman: Good afternoon. I'd first like to take you through the four figures we passed out in the package, and there are these graph documents.
Figure 1 shows the estimated size of the underground in both new home construction and residential renovation; 17% on the new home side, 41% in the renovation side. I should explain that these numbers come from a survey of our members of the Ontario Home Builders' Association, some 3,800-plus companies. This survey was conducted last summer. The particular figures, 17% black market share in new home construction and 41% black market share in renovations, are averages of estimates made by individual builders, renovators and general contractors.
Figure 2 shows how likely it is that a purchaser will ask a builder for a black market deal. The most common deal is to buy a house that the builder has built for "himself." Someone who builds their own house does not have to pay Ontario new home warranty fees, and when they sell the house, there is no GST.
As you can see, there are only a small number of builders who have not been asked, at one time or another, to do a black market deal; for nearly 30%, it is a common occurrence.
Figure 3 shows the same thing for renovation jobs. Almost 60% of renovation contractors say this is a common occurrence.
Figure 4 turns things around a bit. It shows how often a subtrade asks a builder or renovation contractor to pay him or her cash or barter. Nearly 40% say this happens often or on almost every job.
I want to close with a couple of comments about what can and should be done about the underground economy. Stephen suggested that the underground economy is both a political statement and a comment on economic conditions. I want to echo that view. I spend a lot of time going into people's homes and getting to know them. I often say that at the kitchen table is where I do my business, because that's where I mostly talk to individuals. That's how you sell a renovation project. I can tell you that the mood has changed since I started my company some 14 years ago. People talk about the underground economy in a candid and matter-of-fact way today. If they see it as wrong, it's a legal wrong and not a moral wrong, and that is a very important distinction.
You cannot regulate the underground economy out of existence. The answer is not better enforcement of tax laws or stiffer penalties. It's like holding on to sand: The harder you squeeze, the faster it runs out between your fingers.
Part of the solution lies in informing consumers about the risks that go with supposed bargains. When I'm selling a job, I point them out to customers who are eyeing a black market bargain. Ontario Home Builders' has worked with MCCR over the years to develop a series of consumer guides that talk about these risks and describe how to avoid them, and there are a series of renovation how-tos and not-tos that we've put out in consultation with and with the help of MCCR. But the bigger part of the solution will come from relieving the frustration that has come with excessive taxes and regulations.
When you're trying to solve a problem like this, it's tempting to look for simple causes. Simple causes have simple solutions. Maybe it was the GST or the depression or both that broke the camel's back and started the movement towards the underground, but what started the movement is no longer important. The important thing now is what sustains it. People have found an underground economy with fewer rules and fewer taxes, and they will stay there in that underground economy until the rules and the taxes of the aboveboard economy are more to their liking.
I want to thank you for your attention to my comments, and I think Stephen and I will be pleased to answer any questions.
The Chair: Thank you very much. We have 30 minutes within which to field questions, divided 10 minutes per caucus. We'll start with Mr Kwinter.
Mr Kwinter: Gentlemen, thank you for your presentation. I found it very interesting.
One of the concerns that I have, and you talk about it at the end of your presentation, is the fact that it may have been the GST, it may have been the depression, but something broke the camel's back and started the movement towards the underground.
To use another cliché, I think the genie is out of the bottle, and I don't think you're going to get it back in again. Regardless of what happens, we are always going to have income tax, we are always going to have some form of sales tax and we're always going to have some form, whether they change the name or hide it or do whatever, of value added tax. It's really just a matter of quantity: Is it going to be lower? Is it going to be higher? Is it going to be hidden? Is it going to be open? But it's going to be there.
I'm just wondering what your feeling is, because you say that if these things are addressed and if the regulations are addressed, then maybe you could get this underground economy under control. I have some serious concerns, once people get the feel that if they're dealing with tradesmen, if they're dealing with people where they can save whatever the amount is, where they can save the sales tax or whatever form of GST is developed and if they can save some of these other things, about how we get that back to the point where we say: "Okay, I'm not interested in saving that money. I'm prepared to pay the taxes, prepared to pay all of these things, and you can't tempt me at all with any kind of savings." How do you deal with that?
Mr Kaiser: It's a tough question, Mr Kwinter. I guess we'd like to throw that one back to you. But I think my answer would be that there's been a mood swing in the consumer. That's what's happened. For our industry, when we sit down at the table with a consumer, the word "cash" usually comes up within the first five minutes of conversation. I think this committee would be shocked at the type of people the word "cash" comes up with; I mean, people you wouldn't normally associate that kind of dealing with.
Mr Gary Carr (Oakville South): Politicians?
Mr Kaiser: People from all walks of life, let's say.
The mood is out there that the consumers feel they're overtaxed, they're overburdened, and that what they're doing is not morally wrong to them. I think there has to be a mood shift back in the other direction, be it a joining again of the general public and government to getting the direction where there is the best bang for the tax dollar being spent, where the taxpayer sees that shift out there, that the government is really trying to close the door and give them the best deal for their dollar. I think the public would join in, in concert with the government, towards this effort.
1550
Mr Kwinter: If I could just expand on it, let me give you an example. I had someone come into my constituency office a few weeks ago, and they were absolutely distraught. They work in the broader public service. Their salary has been frozen. They now have to deal with the social contract, where in fact their salary's going to be reduced.
When they came to see me, and they wanted me to do something about it, what they wanted me to do was to put in a price freeze on everything, because they said: "How could it be that my income is frozen and going to be reduced but everything else is going up? So not only am I not making as much money as I used to make, but I'm falling further and further behind, because even though my particular income is frozen, all of the goods and services and all of my costs keep going up."
I said to them that governments weren't in a position -- I guess they could be. Politically, it's unsaleable to suddenly freeze everything and say no one can charge anything more than anything else. But that, by its very nature, is tailor-made for these people to say: "Somehow or other, I have to try and deal with this situation. Otherwise, we're going to lose everything."
The only way they can do it is to sort of plug into the underground economy to see if they can make some savings. It's going to keep them hopefully at least even and maybe get a little bit of benefit. That is a real, major difficulty, and how do you address that?
Mr McColeman: I think Stephen has a good grasp of the fact that it is this state of mind. Let me give you a couple of examples from the private side of industry, where I've had to lay off six people over the last three years who've lost their jobs because there isn't enough renovation work out there and who've actually had to bring the rest of the staff in and say, "You have to take $1 an hour less if we're still going to compete in this market."
Excuse me, but I don't feel tremendously that -- I know there's been sacrifice on the public sector side, but in comparison to what's happened on the private sector side, there is no comparison. These people have to live with fear of whether we're going to have enough work next week.
So I understand where that person's coming from, and it's just like, I have just completed a job for two public servants who are school teachers. The reality is that the job we did for them was less costly than it was three years ago and the reality is that my products I'm buying today, for example, the windows I put into that addition to their house, cost me 20% less today than they did three years ago.
The fact is, there has to be this education, I think, of the public, of the consumer. If you're trying to make them deal aboveboard and not go to the underground, I think you have to make them believe that what it is you're trying to enforce is just and fair and reasonable. I think when you can make that sale to them that it is, that when I go and I'm being compared --
Another example, a bathroom we just completed: My price was $20,000, my competitor's price was $7,000. It was a cash deal. They wanted my company to do it and they asked me to explain why. I had to go in and make basically an educational seminar out of the sales function, because that's what was required to show them where the costs were and what my tax burden was, and, you know, "If we're all going to live in a fine province, we have to stay aboveboard here."
All I'm suggesting to you is this: I think people have to see what they're being asked to pay is fair and reasonable and is just. I think when they see that, they're willing to pay it. What has happened is that perhaps the pendulum has swung the other way, that they're not perceiving it that way today, so it's not a moral wrong to do a black market deal for anybody.
How you get it back, I don't know whether that helps in answering that question, but I think maybe one of the things government can do is put its own house in order, in order that people can perceive what it is government's asking them to pay to be just what I've said: just, fair and reasonable.
Mr Kwinter: Just for clarification, I wasn't trying to defend this person's particular point of view. I was just reporting what they said to me.
Mr McColeman: I understand. I run into it every day.
Mr Kwinter: We also have a situation where of course people who are working are the people who can participate in the underground economy. If you're not working, you can't participate anyway.
But you just make a point that I think is really telling. You're going to have to be a pretty good salesman to convince someone that the difference between $7,000 and $20,000 is worth paying.
Mr McColeman: Right.
Mr Kwinter: That is going to take some salesmanship on your part, believe me.
Mr McColeman: Absolutely.
Mr Kwinter: One last question I'd like to ask you, and I'm just curious to know from a practical sense. On page 3 of your submission, you talk about the builder who builds a house for himself and as a result doesn't have to pay the Ontario New Home Warranty fee and also doesn't have to get involved with GST. They can't classify every house they build as their own house; there surely has got to be a time limit as to the number of houses you can build for yourself to be eligible for these particular benefits.
Mr Kaiser: You're correct, Mr Kwinter. A builder or a person who wants to call themselves a builder cannot continually build a house and flip a house, say, "I lived in it for a day," and sell it. But what happens is that you do have people who live in a house for a very short time and then build another one and build another one after that and sell those houses. The resale market is not subject to the GST, as the new home market is.
Mr McColeman: If I can just give you another example: a builder who would go to you as a home owner and say: "Mr Kwinter, you take out the building permit. You're building this house for yourself on paper and I'm going to be your builder."
Mr Carr: Thank you very much for your presentation. I'm interested in your reaction, what you think will happen if the federal and provincial governments get together and decide to bury it.
I think a lot of people, if you give them a price of $100, including all the taxes, if they think you're getting it, would be more willing to pay it than if the government was getting it. But if we con the people and hide it and bury it, do you think psychologically it'll make it easier for people and do you think we'll get around this problem because they won't know, they'll just get quoted a price?
Essentially, I'm saying that the provinces and the federal government will be sitting down about what to do with the GST. I don't think anybody in this room believes it's going to be eliminated from paying a tax. What I do believe is that they're going to hide it from the public. Do you think that will have a psychological impact that will benefit consumers, that they will then feel good about it and end up paying it?
Mr McColeman: In my mind, that will drive them further to the underground when they understand. There's a low confidence level right now by the general public, as you know, in government's behaviour. All that will do is push it further underground. Taxes are one of the issues; another issue is regulation. A lot of people in our industry are very strong technically, but the business side of their business happens when they get home after swinging the hammer all day. There's all the government red tape and regulations that they have to deal with -- submitting UI, submitting ever-increasing workers' compensation premiums etc -- that are also avoided when you deal on the black market. It's one issue, but I would think your comment would lead people even further towards the black market.
Mr Carr: Isn't it true, though, that -- because this was discussed when the GST was brought in -- the government of the time chose not to bury it? One of the reasons was that businesses didn't want it buried because they thought that instead of the government taking the flak over it, people would just think you're taking 7% extra.
I'm amazed at the number of people who never even knew, even politicians, that there was a manufacturers' sales tax. When the GST was brought in, the reason it was left open was so that businesses could not hide it and the goat of all this would be the government. They would see very clearly and they would be up front.
What you seem to be saying to me is that if the federal and provincial governments get together, as they will, over the GST, you would be pushing for them not to have it buried and hidden. We've got the CFIB next, with Mr Bulloch. What do you think the reaction will be from other businesses? Do they like to have it up front, where you can blame the government and not yourselves?
The second question on that point, just along with that, is on page 3, when you say that in renovations 60% of people opted for cash. Isn't it true that people in the renovation business -- obviously not yourself -- to beat their competitor, will in fact not wait to be asked; they will ask people, "If you pay cash, this is the price"?
We're blaming the people for this, saying they're asking you if it's cash. You're not going to sit here and tell me that contractors don't offer cash to help get the sale and beat their competitor. How much of it is the public and how much is it business saying: "The competitor's out there. I'll go first. I'll ask them whether they want to pay cash and beat them to the punch"? How much is that happening? I would argue with you, and correct me if I'm wrong, that's happening in more than 60% of the cases from the renovation people's standpoint.
1600
Mr McColeman: Why don't I take the renovation question and then you can go back to the GST question?
A good point about who asks who. It used to be that contractors asked consumers. Now consumers ask contractors. That was the distinction we made earlier, more so. Contractors still do. You're right. However, the more prevalent thing now is sitting down to discuss a project and having the consumer suggest it.
That is happening, and I'll give you an example. This morning I was working with my roofing subcontractor. He's been in business probably 12 years or so, a very good operating company. He tells me that most of his residential roofing today, 90% of it, is done in black market cash deals. That's people going out and asking him to do a roof, saying, "If we pay you cash, what's the price?" That would be probably contracts between $3,000 and $5,000.
We did some calculations, and they weren't part of our presentation, but we can conservatively estimate that the tax loss on renovation, and probably the new home construction, is in excess of $1 billion, conservatively, taxes lost because of the underground.
Mr Carr: That's a billion with a B, right?
Mr McColeman: With a B. I've got how we did those calculations here if you're interested in hearing how we did that, but the reality is, that's what I've noticed, it didn't used to be so prevalent. It's really quite easy to handle a contractor who asks a customer, because then the customer automatically becomes suspicious as to whether this person is even going to get their job done. But when it starts happening in the opposite direction is where perhaps we've really passed a certain threshold.
Mr Kaiser: Your question on the GST: As we're talking today, we're not talking specifically about the GST but the whole gamut combined of regulation taxation, but you've touched on the GST.
Mr Carr: You know that's what they're thinking of doing, combining them.
Mr Kaiser: It's not a simple tax to handle for small businesses. As Phil has stated, our industry is to a large extent made up of the fellow who works during the day and does his books at night. I can tell you that we had a GST auditor -- and my business is a small business -- into our business a couple of months ago, and he wasn't sure of some of the questions. He was going to go away on course and perhaps we'll get the answers when he comes back. So this handling of the GST has caused a whole other phase of overhead for the small business person in this province who, to a large extent, is a big part of our industry.
Mr Carr: I think that noise you heard was the people in Finance falling over when you gave the billion-dollar figure. I can just see Floyd Laughren's mouth watering when he thinks of a billion dollars coming in, so just for his sake, maybe you could pass on that calculation. He'll probably stay up late trying to figure out ways to capture some of that. If you could pass it to the members, I think it would be helpful.
My last question is, on page 4, you also say you've been working with Consumer and Commercial Relations to develop a series of consumer guides. I suspect all you've done with that is just highlighted the fact that other people are doing it and probably encouraged more people to go underground by trying to tell people about what was happening.
Obviously those things are a drop in the bucket and meaningless, and you don't think we should be doing anything along the lines of trying to appeal to people's moral values to pay the tax, because we say so in a brochure. Surely, you don't think that's going to do it?
Mr McColeman: Can I respond to that? Because I was kind of one of the key players in initiating it through the renovation industry to get these brochures into home owners' hands. What they deal with, more so, are the risks of doing the black market deal. In other words, if government can do anything, I think what it can do is perhaps educate consumers to the risks when you pay cash. The fact that there is no workers' compensation coverage if someone falls off a ladder, and some of the legal risks they take by doing a cash deal.
What we did with MCCR is we developed four brochures: how to hire a renovation contractor, a standard renovation contract, the dos and don'ts and I think the last one dealt specifically with the black market; it spoke directly to that, what the inherent risks are of dealing in the black market. Those have been extremely helpful for the professional side of the renovation industry.
There is a strong professional group of renovation contractors in the province, albeit they are few in number compared to the black market operators, frankly. But those have been very useful, and maybe the one thing government can do is just do that, educate the public as to the risks they're running, because most people do not understand, and when they do get it explained to them, as I do over and over again, it tends to sway them; not all the time, but it helps.
Mr Carr: One last question just on that same point. At the bottom of page 4, you say that people will stay in the underground economy until the rules and taxes of the aboveboard economy are more to their liking. It obviously isn't now.
In terms of suggestions, would you be suggesting a different rate, for example, of GST for your commodity? If you were to lower the rate, do you think you could get some of it back -- people, if they had to pay only 2% or something, would pay it? How do you suggest the government handle it, then, if it's not to their liking now? I don't know too many people who like to pay any tax to any government, at any level, of any political stripe. So, on your last comment, how do we deal with that as legislators, when you say people don't want to pay taxes not to their liking?
Mr Kaiser: I don't think we have a magic figure to peg and say, "It should be reduced to this." But I think, as a whole, what we're asking government to look at is taxation, to look at regulation; cut where you can. I think the consumer, as I mentioned earlier, wants to see the responsibility on the spending side, and then they will, we hope, join in on the effort to make the province grow.
The Acting Chair (Mr Mike Cooper): Mr White and then Ms Haslam.
Mr Drummond White (Durham Centre): Thank you, Phil and Stephen. I was very impressed with your presentation. I have just a few questions. The issue you mentioned about a builder building a home supposedly for his own use and then selling it quickly, that would avoid the GST, would it?
Mr Kaiser: Yes.
Mr White: We heard earlier from Mr Kwinter that there will inevitably be a value added tax. A value added tax is the type of tax the GST is. So despite election promises, it sounds like we're in for a long-term GST. What was your reaction to that? I understood you saying that a lot of the onset of this underground economy was with the depression and with the GST.
Mr McColeman: I think we stated that those were two factors in the equation. I think regulation has a lot to do with it as well. I sense, with all due respect, that your comment is politically motivated in the sense of trying to peg it on one thing or the other thing. I'm not so sure that using our time most beneficially here should be pegging one thing or the other.
We're trying to say to you that whatever it is that's pegging people to do black market deals, it's happening now that it's not thought to be wrong in their minds, at least in our experience in the construction industry. If we are going to have GST or a value added tax in the future, so be it, but let's make sure, whatever we do, we try to reverse the mindset of consumers today. If it's reducing the GST for residential renovations and construction, as it is in new home buying -- there's a threshold level of reducing the GST on the lower-end houses, where it's paid at a lesser rate -- if there are schemes like that, that are going to bring confidence back into residential construction, then we're very receptive to that. We'd be very happy to talk to anyone who'd like to embark on that. So maybe there are ways that the government can enhance and encourage us to get our people back to work.
But the reality is that it isn't one tax and it isn't one regulation; it's a whole burden that a small business has to look at, to handle, along with getting the work done. So a small business has a hard time with that.
1610
Mr White: Let's follow that through, Phil. You're suggesting that we should look at some means by which people would be encouraged to be paying their taxes on service, renovations particularly. One thing might be a lower level of value added tax or provincial sales tax, whatever, for renovations. One thing that was done fairly recently was the use of RRSPs for first-time home owners. Would you see some temporary measure like that being used to encourage that tremendous job-intensive industry such as your own?
Mr McColeman: First of all, I don't believe our industry has ever supported government intervention into the industry on a long-term basis. We have supported the 5% down program and the RRSP contributions to stimulate our industry at a time when it's tremendously needed, because we're half the size today, which means half our people are out of work. So they're only short-term measures, in our minds, and we'd rather not have the government stimulate us in that fashion, or intervene to stimulate. What we would rather see is that you'd address the longer-term problem. The black market is here, the black market is operating and it's flourishing and growing. How can we work together with government to try to diminish that and reverse that trend? That's what I think we're here today to discuss.
Mr White: Indeed.
Mrs Haslam: I think Mr Carr was being facetious when he said that Floyd would be stymied and salivating at $1 billion less in revenues. I think he already knows the $1 billion less in revenues is there. Otherwise, we wouldn't be looking at some of the problems that we have.
I'd like to follow up on some of your mood shifts, because that's exactly where I feel that you've hit it on the nose, that there has been a general shift in not the morals but the overall perceptions of people out there of what's right and what's wrong.
I also like your idea about education, and I'd like to follow through. Should the government be educating the public on the value they get for their tax dollar -- the services, the programs, where the tax dollars go out into the ministries and those types of services -- or are you suggesting only in your own area looking at the value and the benefit of a legal contractor versus an illegal contractor?
Mr Kaiser: I think the opportunity is wide open for the government to explore all those areas as far as the consumer goes and show them the value for their dollar and where those dollars go, but specifically today we are asking for a stronger effort to further the efforts of MCCR and our association in regard to educating the consumer to dealing with a recognized reputable contractor on an aboveboard basis.
Mrs Haslam: I have a couple of questions of clarification too. In one of the research articles I've been looking at, a Mr Spiro:
"Spiro's conclusion notes the fact that the GST was introduced in the midst of a recession. People already suffering economic hardship are described as viewing this as an increased temptation to turn to tax evasion" -- which is part but not all of the problem we're facing in an underground economy -- "in order to offset the recession's impact."
When we're coming out of the recession, when things are a little better, do you feel this will be a reverse situation, or has the pattern been set and are the networks already in place and should we be looking very seriously at that particular issue not going away, the issue of underground economy?
Mr Kaiser: I compare it to a conversation I had yesterday with a gentleman who has a farm north of Toronto, about an hour's drive from here. My understanding in conversation with him is that in the farming community, that's a way of life up there: the barter system, the underground economy. I think that way of life, that system, is infiltrating into other areas and into other industries.
Mrs Haslam: Can I interrupt you? Do you consider the barter system an underground economy?
Mr McColeman: Well, it avoids taxes.
Mr Kaiser: Certainly.
Mrs Haslam: Because we were discussing this the other day. Mr Kwinter, was it you, or was it you, Mr Johnson, who was mentioning the barter system and that it was a system that was in place and not unusual in rural areas and not totally illegal and whether that was actually part of the overall underground economy? Two pies for shovelling the walk; it's a barter system. Is that part of the underground economy?
Mr Kaiser: If it evades the taxation that's set up in the province, I think it is a wrong. If it's strictly, "I'll do this for cost for you if you do this for cost for me," and those items are taxed as they would be taxed through the system, no, it's not a wrong. But I think what's happening is, "I'll do this for cash and you do this for cash," or, "I'll give you these items for those items."
Mrs Haslam: I have another clarification. The Canadian Home Builders' Association did an analysis on the effect of the GST on black market renovations. Part of their brief was on the experience of renovators in particular. I'm afraid I didn't know this and I'd like some clarification and comments on it. Many renovation contractors are particularly unhappy with the $30,000 small supplier rule for the GST. This allows renovators whose total work in a year is less than $30,000 not to charge GST to their customers.
My question is, how would you know if you're not going to make $30,000 in a year and whether you charge GST or not on renovations? Can I have a clarification on that? I just found that extremely hard, because it says that many renovation contractors are moonlighting workers. This is an unfair advantage to small moonlighting companies that typically can hide at least some of their renovation jobs and thereby legally avoid having to collect or pay the GST.
Mr McColeman: I have a comment from a couple of angles, but for one, I can easily plan this year to only sell $30,000 of the work and show that this is what I sold in my company. So it can be almost premeditatedly planned to not show more in terms of what I have to show on my books as $30,000 of the business. I think that may be where some GST avoidance or compliance comes in or compliance to the rules, if you will. It's kind of a perverse way to comply, but that's the way to do it.
The other thing is that there legitimately are a lot of people in the industry who are one-person operators who have one vehicle and who wouldn't do a whole lot more business than that if they're doing $100 and $200 jobs in a year. The renovation industry is filled with people from all different -- it's an easy-entry business. You just need a set of tools and a pickup truck really and you're in business. So there are all kinds of people out there who do perform under that threshold level in reality, and it's hard to compete with those people on the smaller-scale projects.
The Chair: Unfortunately, we're out of time. I want to thank Mr Kaiser and Mr McColeman for presenting before the committee this afternoon.
Mr Kaiser: Just one point, if I may: We inserted in the packages that were passed around to the committee members a resolution that's titled Resolution 8. That came out of a package of resolutions that came from the conference of the Ontario Home Builders' Association early in October. It's self-explanatory, but I must say that was passed without anticipation of coming here today.
The Chair: Thank you.
Mr Kaiser: Thank you for the opportunity to come here.
CANADIAN FEDERATION OF INDEPENDENT BUSINESS
The Chair: Our next presenters before the committee this afternoon are Mr John Bulloch, Ms Catherine Swift and Ms Judith Andrew representing the Canadian Federation of Independent Business. If you would please find yourself forward here and make yourselves comfortable, at that time, when you're ready, please make your presentation. I might add that you are familiar individuals. However, if you could please identify yourselves for the purposes of Hansard and the committee members, it would be appreciated.
Ms Judith Andrew: Good afternoon. We're very pleased to be here on behalf of the Canadian Federation of Independent Business. My name is Judith Andrew. I'm the director of provincial policy. I'm joined on my right by John Bulloch, the president of the Canadian Federation of Independent Business, and Catherine Swift, our senior vice-president. Catherine will lead off this afternoon.
1620
Ms Catherine Swift: Our brief has been distributed to you, I believe. We've also included our submission to the Fair Tax Commission because, needless to say, taxes are a part of the difficulty here and we thought that instead of reiterating that, we would just submit what we had already submitted on the tax issue.
I'd just like to very quickly highlight what we do lay out in our brief, and then John would like to make some comments as well as someone who has studied this issue for over 20 years now, not just in Canada but around the world, and so brings a somewhat unique perspective.
As most people have noted with this issue, we've always had an underground economy in Canada, as just about all countries do. The current sort of sudden focus on the issue has only come about because we have all observed a dramatic growth over the past few years, although in terms of an international context, Canada is really sort of just catching up, we believe, in terms of the proportion of our overall economic activity that is taking place underground; we've only just caught up with a number of other countries around the world.
We have observed different causes for the growth of the underground sector in developed countries versus less-developed countries. In less-developed countries, it tends to be more factors such as the lack of efficient financial and policy infrastructure. Many people, for example, both as small business people and consumers, find it's simply a lot easier to operate in an underground manner. Often multiple permits and so on are required, bribing of bureaucrats etc. As well, there are other issues; for example, for a small business looking at attempting to finance its operations, the lack of a good banking system which we see in many countries and the lack of things like legally enforceable property rights, so that someone who has an asset against which to borrow for a business ends up driving a lot of people into small, self-employed, undeclared types of activity.
In developed countries, the causes are somewhat different. Typically, they are as a result of overtaxation and overregulation. Other things that come into effect, of course, are things such as the stage of the business cycle. Recessions tend to drive more activity underground; improved economic circumstances usually tend to bring some of it at least back into the formal sector. Finally, political factors are also very important. Typically, even a highly taxed or overregulated population that has confidence in its political leadership is a lot less likely to have a growing proportion of undeclared activity than people who believe their tax dollars are being wasted. This is, I think, why we see some fairly highly taxed countries still not having a massive underground problem and some countries that are not really highly taxed having a major underground problem. It's not simply a tax issue.
In Canada we have seen quite a bit of dramatic growth recently, and it does seem that the coincidence of the GST and the recession, which did happen around the same time -- that these were catalysts, if not lone causes. Throughout the 1980s our membership certainly saw a tax frenzy by all levels of government, and of course we had reasonable economic growth for a few years, so people grudgingly absorbed the taxes as the recession hit. All those taxes that had been laid on during that period became unsustainable. We see now, I believe, where an awful lot of the revenue problems experienced by governments are really indicative of the fact that we've reached the point of diminishing returns to taxation, where we increase taxes and actually end up with less revenue overall as a result. So more taxes cannot be viewed as the answer.
Our membership also was very close to one of the first visible manifestations of exploding underground activity in cross-border shopping, where again we had a lot of factors combined: recession, GST, a very high dollar and very high interest rates. Although that's abated a bit, we still see our level of cross-border activity as very much higher than it was in the mid-1980s and as still a problem, although it seems to have plateaued.
Technology is also somewhat of a factor as a facilitator. We find an awful lot of businesses that might have previously existed, say, on a main street, had two or three employees, paid their local property taxes, all those payroll taxes and so on, and now find, for tax-driven reasons and facilitated by technology, they can move into their home, subcontract work out when required, operate effectively as a self-employed person and not pay all those taxes. Again, a lot of that is perfectly formal. Some of it is also happening in an informal, underground manner.
Something that just came up in the latter part of the last presentation is the growth of barter networks. Again, technically speaking, tax is supposed to be paid on barter transactions, so I guess you only consider it part of the underground economy if it is not being paid. But certainly the tax situation has been a main driving force behind the growth of barter networks. I guess I find it ironic, looking back at my Economics 100, that barter was viewed as very archaic before we had currency systems and means of exchange that were more sophisticated. Now we are going back to the caveman days, driven very much by tax policy and regulatory policy, so it's perverse in that respect.
I think, too, a very important factor is Canadian taxpayers' dissatisfaction with governments generally and their institutions generally. Canadians, too, historically have been more law- abiding and more compliant in their taxpaying than have many other nations. So here we are seeing a really quite law-abiding nation historically being put over the edge by a number of policies, combined with the fact that they don't believe their tax dollars are being spent intelligently. We believe this is perhaps the major driving force, combined with the other issues that we've heard about from our members such as MP and MPP pensions and the kinds of reductions we've seen in private sector employment and compensation while taxes continue to rise and the public sector is barely touched by cutbacks to date right across the board compared to what the private sector has endured and continues to endure. As well, during this period we see deficits continuing to rise, and of course this is perceived by most people, rightly, as gross mismanagement of their tax dollars.
What we've seen in Ontario alone has been a range of taxes, increasing regulation and legislation which has certainly convinced the small business population that the provincial government is very out of touch with reality and does not deserve respect.
We see, for example, at a time of major structural change and cyclical recession and fiscal crisis the government continuing to increase taxes and introducing intrusive and costly legislation, things such as labour relations reform and employment equity, for a couple of recent examples; things such as the $50 corporate registration fee, which maybe isn't a lot of money, but which in combination with our climate of overall increasing taxes, regulation and aggravation for small business people takes on much greater importance than it would in a different climate. So all of these things are incremental factors that are leading businesses to effectively thumb their noses at governments, and consumers as well. One means of doing so, of course, is via the underground economy.
In terms of size of the underground economy, we've certainly seen a lot of estimates. Of course, we'll never see a definitive number because of the nature of the beast, but our data certain concur with a lot of estimates that have been put out by people like François Vaillancourt, who came out with something last week at the Canadian Tax Foundation conference, and others, that somewhere between 12% and 15% of Canada's GDP is probably a reasonable current estimate. Things such as currency and circulation and so on, the amount of large bills in circulation, all of these things also give us a pretty good picture that at least we do see dramatic increases in the underground economy.
Of course, there are a lot of problems arising from underground economic expansion. From a government perspective, naturally the fixation is always on so-called revenue shortfalls, which we often view as expenditure overrides, but I guess it's a matter of perspective.
There was a quote in a recent Economist article, and I noticed other parts of it quoted by the finance department, but the part that I guess we'd be most in agreement with is the statement that "as a rule, the higher the taxation and the more onerous the regulations in the formal economy, the bigger the informal economy is likely to be."
There are a number of problems in a longer-term perspective. One, of course, is that we ultimately will seriously endanger the kinds of core programs that Canadians do want to see provided via their tax dollars: things like education, health care and some social services.
1630
Also, what is of concern when you look around the world to countries that maybe 15 years ago were where we are now in terms of underground activity is that none of the governments have ever responded by decreasing the burden of taxation and regulation, and as a result, underground activity continues to expand.
What we also see is that the typical reaction of governments is to step up costly enforcement. What that has done in every other country it has been tried in has been to drive more activity underground. You just get into the vicious cycle of increasing taxation, increasing enforcement and an increasing underground economy.
Other problems of course are that when you're trying to make policy -- anything from trying to project your revenues as a government to trying to guess if people are really unemployed or if they're working in an underground economy, how accurate things like our unemployment rate are and so on -- if you're trying to base policy on wrong numbers, you're not very likely to get very good policy out of it. So that's a difficulty as well.
From the small business perspective, we do see treatment of the underground economy moving out of the denial stage. Remember the introduction of the GST? Notably, we had briefs several years ago that can be referenced that said this would increase underground activity. "Oh, no, no, no," was what we heard from the federal tax collectors at the time, and unfortunately our predictions have turned out to be regrettably very true.
We find, however, now that we're out of the denial stage, that this is a problem. We're in the finger-pointing and scapegoat-seeking stage where various levels of government would all like to blame somebody else when really everyone has a hand in this and hopefully everyone can try to be part of the solution to it.
As we see, there are three main causes of the problem in Canada: high and increasing taxes, a high level of regulation and a growing dissatisfaction on the part of all taxpayers with the ways in which governments are spending tax dollars. These are of course all interrelated factors since they tend to move in concert. We feel that reversing these trends is really the only way we're going to get any kind of grip on underground economic growth. As we say, international experience shows there is no enforcement solution. You will spend more money to increasingly collect less money over time, and this has happened to every government around the world. Canada will be no exception.
The only enduring solution we see will be an overall reduction in the size of government leading to at least a levelling, and ultimately a reduction, in the level of taxation and regulatory burden on small and medium-sized firms, and consumers as well. This in turn will assist in getting back a little more confidence in governments, their policies and the way they spend tax dollars.
Mr John Bulloch: I'm just going to perhaps supplement in a minor way Catherine's comments. For the 20 years that I've been involved in an organization called the International Small Business Congress, I have been listening to papers and research studies and debates on the informal economy, or what we call in North America the underground economy. It is a multilayered issue, but there are threads that you can follow when you look at the phenomenon in developing countries that are relevant to more sophisticated economies.
The growth of the underground economy is a signal that something is fundamentally wrong in your society, that your democracy isn't working properly. It can be seen as the result of discrimination in your society, unfairness, lack of respect for democratic institutions and authority generally. The policy implications are almost overwhelming.
Certainly the most frightening to governments, with their present deficit problems, is that they possibly do not have a revenue solution. Certainly they don't have a collection solution. I talked to one government official from Italy who says it costs them $2 to collect $1 in the informal economy.
Looking at this phenomenon in the Third World countries and eastern bloc countries, it's also quite interesting. We think we have bureaucracies in North America; you should see the bureaucracies in countries like India and some of these South American countries. The roadblocks to operating legitimate businesses in terms of getting proper authorities, permits and licences are almost insurmountable. It's much cheaper to pay a bribe, much quicker to pay a bribe. So bribes in the Third World and the underground economy are the developed economy's equivalent of taxes. You have to bribe government officials for everything.
Also, you find quite widespread the lack of a middle class, people who own property. Although they may give people property, the ruling class has not given them legally enforceable property rights, so they can't use their property as collateral for a loan. Therefore, they never get beyond the self-employment stage and they never become employers with any kind of capacity to borrow and to grow. In Third World countries you have like 150,000 people entering the labour force every single day and these people just can't find a place in the economy.
You see these kinds of things when you look at the struggle in these countries. On the surface they seem democratic -- "Hey, we now elect our leaders, we have democracies" -- yet people have no respect for the democratic process because all the other institutions that should go with a democracy, such as the enforcement of the rule of law, don't seem to work when bureaucracies take over and when governments operate in a way that's not transparent. Most of these countries have elections, but the government passes hundreds of thousands of rules and regulations without the public ever knowing anything about them. So it's democracy on the surface.
You start to shift your thinking into the more developed countries and you ask yourself, is there anything we can learn from what's been going on in these less-developed countries, is there any kind of common thread, is there any kind of common sickness? Certainly, in the developed countries the growth of the underground economy is very much associated with the growth of the tax burden and the lack of legitimacy of governments that never mention at election time that they're going to raise taxes. Taxes are things you raise when you get a majority and you've somehow snookered people into thinking you aren't going to raise taxes. So the issue of taxation and legitimacy of the system is quite central.
I would say the GST and the way the government plugged the Senate, used a constitutional device to plug the Senate, and all the publicity around that created an incredible anger. The process is what snapped people, as well as the higher tax level on personal services.
You also get a different phenomenon in terms of areas of prosperity and areas of economic weakness. In areas where there aren't many opportunities, people are working in the underground economy to supplement unemployment insurance or welfare, really just to survive. What we're doing as a society in training these people to develop new skills, what we're doing in this country is raising the quality of our underground economy. We now have really qualified tradespeople who formerly didn't have skills who are now operating in the underground economy and have greatly improved their capacity to earn in the underground economy as a result of our training in terms of becoming licensed welders or mechanics and so on and so forth.
At the last world conference I was at there was quite a debate about the growth of the underground economy in the developed countries and a suggestion, which requires more research, that globalism is throwing more people outside of the economy. The 50-year-old who is out of work without an education is almost toast in our system and really has no way to make a living except to try to eke out some form of self-employment.
Complexity, regulation, taxation, legitimacy of the system, as Catherine said, I think are very important. I was intrigued because this year's world conference was in Switzerland, and it considers itself to have probably the smallest underground economy in Europe. Authority is highly decentralized in the cantons and people are very into the decisions their governments make. They wouldn't introduce a major new tax without a referendum, so the tax system has more legitimacy. They have only a 6.5% national sales tax, a retail sales tax, that's buried in the price, whereas in other European countries the average is closer to about 18%.
1640
There's something else that wasn't mentioned in Catherine's brief that I'm hesitant to say is really the informal economy, but there's another thing that's going on as countries try to come to grips with what's happening. Every government in Canada, federal and provincial, has got a revenue problem -- every single government. In criss-crossing Canada, visiting premiers, every one of them is panicking and every single month they seem to be rejigging their numbers. There's something pretty scary going on.
I don't think governments understand the economy today. I don't think they have models that really tell them clearly what's going on and I think the underground economy is a big part of it. I don't think it's all of it. I think part of it also is the growing global nature of the economy. Most trade today is transfers within corporate networks, and the capacity to evade taxation through intercorporate transfers around the world is also a problem for revenues. The underground economy is another problem for revenues and low inflation is also affecting revenues. So you've got three things that are happening all at the same time, and I don't think any government in Canada right now can forecast squat. They just don't know what they're doing. Department of Finance forecasts are so bad that they themselves admit, "I don't think we really understand the economy today."
You all have revenue problems, and the underground economy is a significant part of it, and also the global economy and low inflation. Those three factors are making traditional econometric models obsolete.
The Chair: Thank you very much for your presentation. We have about a little over 20 minutes, I guess, for questions. We'll start with Mr Carr.
Mr Carr: Thank you very much for your presentation and for your knowledge. To all of you, you always come in and help us out a great deal, and we appreciate it. I guess I'll throw this out to anybody. Maybe you'll want to answer it, John.
As you know, we're going to have probably a year now of looking at what to do. The provincial governments are going to have to come up with a decision. I believe one of the reasons the PST and the GST were never combined was for political reasons. An NDP government, for example, wouldn't combine it and then have its federal counterparts criticize the GST. I think we're in a new era with a new government. I think the PST and the GST could be combined. I know you've been a big believer in that -- administration costs and so on. I want you to comment on what it would mean to your members if the PST and the GST were combined.
The second part of that question is the same thing I asked the gentlemen who were here before you. One of the problems we've got is that when there's a tax that people see, they'll do anything to avoid it. If they said to your members that any extra money would go to the bottom line, more people would be willing to do it. As soon as it goes to government, people put their backs up. The tire tax: That was what a lot of people said, that they'd do anything. If you said you'd wash the car for 50 bucks, people would say go ahead. But if you said it was going to the government, no way.
What are your thoughts if the PST and GST are combined, and having it hidden so that people don't know? First of all, do you agree that they should be combined and then, if so, how does the government do it Would you see more confidence in consumers if in fact it was just hidden from them?
Mr Bulloch: I heard your question when you asked the gentlemen before me and I think you've got the question a little simplified. The problem is that moves to improve the present sales tax regime have two or three different possible options. We have to examine these options with the province and determine which package of winners or losers we want to accept.
If you took the route towards one GST so that you essentially scrapped nine provincial retail sales tax systems and the provinces adapted a value added base, if you ever could get everybody on the same base -- that would be a question -- if theoretically you got all provinces on the same base, you would dramatically reduce the compliance cost to the private sector but would probably increase the size of the underground economy. We have to have a debate on these priorities. Can the underground economy get any worse than it is now?
Certainly, if you combine the federal and provincial systems, you'll have a higher tax on personal services, and it's the personal services that go underground because you can't paper-trail personal services. All through Europe the personal service sector has been underground for almost 20 years because they introduced VATs in the early 1970s, and the average VAT rate is 18%. So you can see the incredible temptation to move that part of the economy underground, and it's just gone. We went to our members with this back in 1986, and the debate has gone from there. We now have to have a fresh debate and we have to have a fresh discussion with the provinces about the various options.
You could have a Japanese-type federal tax. It could be a lot simpler. It could apply to everything, and whether it's hidden or not hidden is a separate debate. That would be something that would bring the rate down from 7% to 5%. You'd reduce the tax on services by spreading it over food and other goods and you'd probably reduce the underground economy, but you wouldn't make the major improvement in appliance costs. It would be somewhat simpler.
This is why our own recommendation to the Liberal government in Ottawa was not to jump in and start saying what it's going to do. Their policy was our advice. The moment you start saying, "We want to do this," half the provinces would disagree with you and you'd be dead in the water. We really have to do the same thing. We have to get down to the ways to make this thing work and determine if the priority in terms of the underground economy is economic or is it compliance, which is a massive multibillion-dollar problem. We have the most inefficient sales tax regime that exists in the world and we are spending 20 cents to give the government a dollar. So compliance costs may be more serious than the underground economy issue. That's the kind of debate we have to get into.
We've got to know what the packages are before we can go out and build a political constituency within small business, because the last time we did it and said, "Let's harmonize the tax into one" -- and we had a constituency for it -- we harmonized in Quebec and we got a worse compliance mess than we ever had before; and the Devine government in Saskatchewan tried to use it as a tax grab. "Harmonization" is kind of a dirty word. We have to start afresh, with a new government talking with the provinces on two or three options.
Certainly you get less underground economy when it's hidden; there's no question. That's why European countries hide it.
Mr Carr: What would your members' feelings be just in terms of the big question of whether to hide it or not?
Mr Bulloch: They would sooner have it visible. That's why we have to go back into the debate and put all the pros and cons and these various options together and not deal with it in isolation but have an intelligent debate on what's best for the country.
Mr Carr: I think what you just hit on is the problem, because there are so many different agendas between the provincial and the federal governments. The problems you just outlined are the reasons I don't think we're ever going to get any agreement. I don't think we would if we had political parties of the same stripes, let alone the problem we've got now. Do you think we will get it?
Mr Bulloch: The difference now, of course, is that the federal government has got some levers. The federal government is coming in at a time when the provinces have to renegotiate their transfer systems. The equalization system comes up next March and they've agreed to look at EPF and CAP at the same time. If they don't touch that, the system will unwind over the rest of the decade. The federal government has got tremendous leverage to get a federal-provincial agreement on the new transfer system, and it should be tied into sales tax reform, because another option is to say to the provinces, "Okay, you take over commodity taxes and we'll just reduce transfers to each province proportionately." That's another option; that's the scrap option.
I think the leverage is there, and for provinces that are absolutely bankrupt, and most of them are up against the wall right across Canada, the tremendous saving to kill the whole cost of collecting retail sales tax for the federal government -- you don't need all those people. They've got the system in place. You can get rid of all the bureaucrats collecting retail sales tax in this country.
Mr Carr: One last question too; I don't know what the time is. In terms of the taxation, we hear continually from this government, "Don't worry, our taxes are no worse in the province of Ontario than in Saskatchewan and Manitoba." The problem is that we're dealing in a global economy and one of the problems we've got with the border is people can go across easily. It doesn't help to compare to somebody else and say we're just as bad.
What is your feeling, in terms of an Ontario standpoint, of our tax structure now? Are we just equal to the other provinces? Are we worse? From your standpoint, having members right across the province, how would you rate Ontario in terms of taxation with the other provinces?
Mr Bulloch: The biggest problem is your tax system relative to the United States. You have terrible problems with cross-border shopping in Alberta. With no sales tax in Alberta, that's a nightmare for BC and Saskatchewan, the leakage of the tax system in those two provinces, with people buying in Alberta. I don't think it's an Ontario-Quebec problem or an Ontario-Manitoba problem; it's an Ontario-US problem, and the cross-border shopping is a reflection of these very significant differentials in gas tax and tax on booze and this kind of stuff.
1650
Ms Swift: We see Ontario as still the worst-taxed jurisdiction in the country. Quebec and Ontario were always sort of vying for number one status and the employer health tax seemed to put Ontario over the top. Of course, recently both Quebec and Ontario did similar things in their budgets with personal income tax and so on, so they stayed in the same relative state, but what John says is very true.
The other thing that's worrisome is that right now we're holding our own vis-à-vis the US because of the low value of the dollar, but if we're complacent and think this is okay, the next time that we have some problems with our currency, some problems with our interest rates -- which hopefully won't happen, but we're very vulnerable right now with the kind of debt we're carrying as a province and as a country -- then that's going to have an impact on the value of our dollar, our interest rates and everything else.
Our competitiveness problems have abated, but the fact they've abated has nothing to do with any improvement in the tax system; it has everything to do with our currency value vis-à-vis the US. So right now we're okay, but we remain very vulnerable to any changes in the future.
The Chair: We're going to go now to Mr White, and I'll remind you that you have about seven or eights minutes and your colleague Ms Haslam would like to ask a question.
Mr White: Thank you very much for your excellent presentation. I'm interested in a couple of things. The solutions aren't all that obvious or clear. You've mentioned, of course, the European experience where some 18% VAT has driven probably a much more substantive part of their economy underground, and one can well understand that. Certainly, in many of the countries in the Mediterranean area that's been a tradition, and to some degree in the UK as well.
You mentioned, Catherine, if people felt that government spending was appropriate, if there was a downsizing of expenditures, if there was a feeling of value for money, that would increase people's willingness to pay their taxes. I'm not so sure, simply because very frequently people come to me and say, "I'm a school teacher and I'm going to be affected by the social contract, and not only that but you're increasing my taxes, and how terrible this is," not putting two and two together and saying that their taxes are also paying their salaries.
People just the other day were talking to me about how we should be spending more for hospitals and government should not be spending money, government should be saving money, but, "Our hospital over here, that should be exempt from that," as if somehow that hospital wasn't a significant part of government spending.
I think very often we have a fairly narrow view of what is okay for spending. It's always that there's a fat cat somewhere, we're not quite sure where it is, but it's not our schools or our hospitals or our roads. I'm wondering how you would see that kind of participation.
John, you mentioned the issue of how in Switzerland taxes are put to a referendum at the canton level. How would you increase this kind of democratic process, the democratic involvement, so people would see that they have a participation in those decisions and that they are getting value for their money?
Ms Swift: For starters, most of our small business members certainly would disagree with the fact that there isn't a lot of fat in a number of places. Most Canadians have seen over the past 20 years -- notably the last 10 -- a massive increase in taxes for all kinds of reasons, some of which were unavoidable, maybe demographic and so on, some of which we believe were avoidable in terms of massive increases in taxes and the size of government. They don't see the delivery on the side of services. They don't see their education system improving. They see teachers' pensions at 9% when the average private sector is half that, and they think that's excessive.
We've done studies on public versus private sector wage differentials. There's a significant wage and benefit differential there. That is seen as unfair. There are a lot of factual observations we could make where there's unfairness.
However, there's no one solution here. This is a complex issue and the problems we see that are definitely driving this phenomenon -- and it's impossible to attribute, "This is worth 10% and this is 25%" or whatever -- are all interrelated. In terms of having more confidence in government, that would have to be coupled with some more sanity in terms of the kind of tax levels and so on. There's no one solution that would in and of itself be successful, but it's interesting how even in some highly taxed jurisdictions, the people seem to still have confidence in their government for whatever reason. Some of it is probably cultural factors as well, when we look at, say, Japan and other countries that are very different societies than we are. So it is a complex issue.
Mr Bulloch: The one theme you find everywhere in the world where you have a large underground economy is a lack of respect for authority and the democratic institutions. If there was more power in the hands of individual elected people and they could vote up or down on a bill without defeating government, there would probably be more respect, more legitimacy of the system. Every government, whether or not it gets in with 37% of the population and gets a majority, seems to raise our taxes. They didn't mention during the election campaign they were going to raise our taxes.
There's a sense that the system doesn't work. Whether it's perceived or whether it's real -- discrimination, unfairness, a sense of legitimacy -- it doesn't matter; it's the same problem. You have a real problem and you have a political problem in this country. The underground economy is a symptom that something's going wrong with your democracy.
You only get a sense of that when you look at some of the unbelievable numbers from east bloc countries and South America, where half the population is working for unregistered enterprises. The numbers around the world are incredible: Two billion people work in the underground economy in developing countries.
This is a major world issue. Look at the eastern bloc countries. They now have democracy but there are no property rights; there's no respect for authority; the bureaucracy is atrocious. To try to get approval, you wait nine months to try to do anything legitimate. Slip the guy money, you get it done in a day. The respect for law and order and rule of law isn't there.
Everything's a question of degree. Something has happened in Canada and it isn't a matter of whether it's legitimate or, "Hey, we have to pay for hospitals; we have to pay for schools." In some cases we do believe there is unfairness in the system in terms of public sector versus private sector compensation, and that's real numbers. But beyond that, there's a perception that the system is fundamentally discriminatory and unfair and we have to deal with that as a society, because what's happening here is so profound.
I recently talked to Dr Savage, the new Premier of Nova Scotia. He's probably the straightest guy you'll ever find in public life. He's as straight as a die. He now looks like a conniving, dishonest politician because he thought he was going to come into office and not raise taxes. He's sitting there, and as he tried to explain to me, he's had his revenues downgraded every month for three months when he got into power, and he's got the bond rating agencies giving him a number he has to meet within a certain day or he gets downgraded and he spends another $80 million on interest charges.
1700
The nightmare that governments face today is unbelievable. I have great worry as a citizen about this problem. It is massive and it is deeply troubling. The Ontario NDP worries me, because I think Floyd Laughren thinks he can raise taxes again next year. He's told people that he doesn't think we're taxed out.
I'm telling you that if I read what's going on accurately, there isn't a revenue solution left for any government, and the federal and provincial governments right now are looking at a $9-billion revenue shortfall. I don't think it's all the underground economy, but it's a big piece of it. They all met privately. The federal government and the provinces agreed to cut their deficits from $61 billion to $52 billion. They made this agreement, and six months later they're all looking at a $9-billion revenue shortfall in the upcoming year, and they're right back to the old $61-billion number. What's happened? Almost all the provinces have been raising taxes again.
Do you know that since Clinton raised his taxes in the States, the spread between Canada and US taxes has increased rather than decreased? We thought, "Clinton, if you just tax their pants off, Willy, you might save our bacon up here." But what's happening up here is that the provinces have raised their taxes higher than what Clinton has raised his taxes down there. Now the spread is actually wider between Canadian and US taxes, something like 27%; it was formerly 25%. So we've got a serious problem and we've got to stop looking at revenue solutions.
The Chair: Mr Phillips, I understand you have to hurry off to the House and I'm going to give you an opportunity.
Mr Phillips: If the NDP caucus wouldn't mind, I wouldn't mind asking a quick question.
The Chair: We'll come back to them in just a minute.
Mr Phillips: Okay. I am scheduled to speak in the Legislature. I thought we'd end at 5.
I want, first off, to thank you for being here and to say I that think it was actually your speech that prodded me into prodding us into doing this study. So you have accomplished that much anyway, and I'm pleased that the committee's doing it. I think the committee's gone beyond both denial and finger-pointing; I think the committee is genuinely looking for solutions. If that's any comfort to you, I think at least the people here, as I say, are genuinely at the third stage of the problem.
Ms Andrew: Excuse me. It wasn't clear that the Ministry of Finance had gone beyond the point of denial. In fact, they were downplaying the role of taxation in this problem, and I think that's a major issue for your committee.
Mr Phillips: I think the committee's at least prepared to look at it.
The next thing I'd say is that I think, Mr Bulloch, you've got your finger on what I'm convinced is reality, and that is that as you look at revenue coming in, there's no logical explanation why it's so weak on historical economic indicators. The old 90% of nominal GDP leaves us, I think, about $4 billion short, and that's probably a fairly conservative estimate. So something profound is happening, and I agree with that. I think it's one we need to look at.
I think you've helped define the size of the problem, but I got the feeling from the chamber this morning that it felt we're almost on the edge of an accelerated growth in the underground economy, that there are a lot of people who have played by the rules to date, but there's a perception that everybody else is benefiting from the underground economy. Have you any sense of whether this is a problem that is just growing at its normal rate as it peaked out, or is there any risk that we're on the edge of some accelerated problem here?
Mr Bulloch: I think it's growing. The thing is quite insidious, and once it gets started, other people are forced into it to survive. The thing is a sickness in your society that gets a life of its own and grows. Our job as citizens is to halt it and reverse it. That's probably what this committee's about and that's why we're here, to try to help in that respect. But it is a very scary phenomenon.
The problem is that you never know whether you're measuring it accurately, but you get a pretty good sense that there has been a dramatic jump since 1989. It's always been a significant problem. Every economy in the world has a certain amount of crime and a certain amount of smuggling and a certain amount of what you call large-scale, organized underground activity. But once it starts to move right across, where probably maybe half to two thirds of your population are engaging in it in some manner -- when three to four million people cross the border every day, they're not going over there just to shake hands with their relatives on the other side of the border. They're going there to buy gas and to buy clothes and there's no way you can enforce it at the border.
You have something that probably involves maybe two thirds of all Canadians and it's all small amounts. The idea that you can go out there and catch somebody and really claim a lot of money is not the way it works. The vast majority of people are supplementing income. The underground economy is underpinned by the UI and welfare system. You've got to get into UI reform, welfare reform, tax reform. You've got to get at the legitimacy of your institutions, the way you make legislation, the way you treat the taxpayers. It's a symptom of a massive sickness in your democracy.
Ms Swift: Probably the only short-term improvement that we see, because we're talking about reforming things that can't be done next week; we're talking about change that has to -- you're not going to restore confidence in institutions etc in a short period of time. If we had a somewhat healthier economy over the next little while, which we're all hoping we will have, underground economic activity will probably at least plateau, I would suspect. There wouldn't be as much incentive; there wouldn't be, hopefully, as many unemployed people and so on. I think that would probably plateau it. Mind you, the next time economic activity dips again -- we haven't managed to secure business cycles yet, so it undoubtedly will -- what you'll see probably again, because this has been the experience elsewhere, is another incremental increase in underground economic activity if you haven't done anything about those other issues.
Hopefully, a bit better economy in the next little while will give us a bit of a reprieve, because I don't think we see that acceleration necessarily. But of course, even if we do get the growth and governments decide, "Let's keep cranking up the taxes and regulation and continue in our past ways," then even somewhat of a recovery won't save us.
Mrs Haslam: Actually, I was glad to hear some of those comments and I'm glad to hear the oral presentation versus the written presentation because in your written presentation you say, "The growth of underground activity has come about as a result of overtaxation and overregulation," and yet you, in your oral presentation, have said it's simply not a taxation issue; it's a complex issue and it's interrelated. I agree with those things.
When you look at some of the other things in the written causes of rapid growth of underground activity in Canada, I'm glad to hear you elaborate on that and say, "Yes, it is due to unemployment." There are families out there with no money that turn to other ways of doing the job. We've had a brief discussion on the barter system. You said that the incremental increase in the underground can be tied to a recession and tied to the economy.
Again, on page 6 of your written one, you said, "As a rule, the higher the taxation and the more onerous the regulations in the formal economy, the bigger the informal one is likely to be." Yet I was glad to hear you state later that that is not always correct, because when you look at the facts and figures that I have, we see Japan -- and you're right: Culture does have a great bit to play in it and attitudes do have a large part to play in what's going on in the underground activity.
When you look at the charts, they show Japan, as a tax rate of its GDP, has a 70% tax rating and yet the underground economy is only 5%. But you look at Canada, as a 50% tax rate -- it has a 10% rate of GDP underground. Then you look at Italy that has an even higher tax rate than Canada and yet it's at 20% of GDP of the underground economy. I think you're absolutely right: Culture plays a role, attitudes play a role and it's not just on the more formal versus informal.
But I really liked, on page 8, when you seem to come to "attacking the underground economic expansion" was "to treat the disease," and you came up with some suggestions, I've looked at them and it seems to me you're saying government downsizing, cuts in programs so that they are run more efficiently, streamlining regulations for small business and a fairer taxation system, and I agree. I think those are things that we have to look at very carefully.
My questions, then, are around a couple of things. Number one, when you talk about your membership, do you have a knowledge of the percentage of your membership involved in underground economy? As I found in the previous presenters, everybody knew somebody, but nobody was involved in it. Do you know the percentage of your members involved in an underground economy?
1710
Also, there was an article -- I assume, Mr Bulloch, that this was something that you were involved in -- from the Financial Post, in June 1993. The last comments you had were: "More is at stake than a steady stream of taxes for government. High taxes and a recession have combined to produce organized smuggling networks reminiscent of the Prohibition era."
So my second question is, do you think these networks are firmly established, or can we combat them in the future? I found it interesting that somebody mentioned the plateau being tied again to a recession, and when we're coming out of that recession perhaps that plateau will be there. I'm more interested to see whether, the networks having been firmly established, we can actually come down from the plateau -- not a plateau; can we get down from that idea of the networks are in place?
The reason I ask that question is because, around tobacco, if Clinton raises the taxes on tobacco, if the bordering states are raising the taxes on their tobacco, which we understand they're looking at, that lowers the differential between the two. If we look at a better health care system in the States, that also comes into play. If we're looking at a better way of policing the smuggling, then it no longer becomes profitable for them to bring it in when we're looking at packaging and other ways. I'm looking at whether in the future we can actually bring down that underground economy.
Mr Bulloch: Let me just answer a couple of your questions and then Catherine can fill in. On your comments about Japan or Switzerland, these are countries that have --
Mrs Haslam: No, not Switzerland. Go ahead. I didn't mention Switzerland.
Mr Bulloch: Both go through a great deal of effort to develop political consensus. Japan has its own way of doing it and Switzerland has its own way of doing it. It's very much part of their laws and their culture. So there is a greater consensus in Japan on what's right and what's wrong, and almost everybody kind of speaks from the same hymn book, which you don't get in heterogeneous kinds of cultures like Canada.
Also, the Japanese sales tax rate is 3% and the Swiss rate is 6.5%. The big reason why there's so much difference in the underground economy in Switzerland compared to, say, Britain or France is the dramatic differences in the rates on VAT, in the 18% area on average. Of course, the value added tax, which puts it on personal services, is where all the leakage is because you really can't paper-trail personal services and there's really no enforcement mechanism.
The federal government has not caught up with what it can do on enforcement. I happen to know a fair amount about the computer models that they have available for paper-trailing goods and catching anomalies, coming in and catching them. They do that in Europe and they have people in jail all the time in Europe for VAT evasion. That machinery has not been put in place yet, but Europe has never been able to really collect any money on the personal services side. That's why provinces don't tax personal services, because they know that's where all the leakage is and they can't enforce it.
In terms of our own members, our members are mostly people who employ people. Probably more of them are victims, but they really are a mirror of society, and if somebody was doing something illegal, if you asked them in a survey, "Are you breaking the law?" I can just imagine them saying, "Oh yes, I'm breaking the law." So there's almost no way you'd ever really know. Small businesses mirror your society in terms of culture, language, age, income -- everything. Whatever is happening in society generally is happening in small business, for good and for bad. They're just a cross-section of your society.
In terms of networks, I think we're referring to smuggling. If you're going to be that stupid and have that kind of differential between Canada and the US on excise taxes, you're going to get massive smuggling of booze and cigarettes. Then it becomes highly organized, and that's a totally different issue.
I think, as you suggest, some of these spreads will narrow. We'll bring ours down, the Americans will bring theirs up and we'll probably eliminate that massive smuggling that's going on. In most areas of the underground economy our members feel victims. We've done our own surveying, and they are being hurt dramatically. They're losing business dramatically to underground economic activity. So if they get hurt, they have to lay off people.
I can give you an example of a company not far from my cottage that used to have 44 electricians who specialized in home contracting and cottage work. As a result of the GST and the recession, the owner's back down to himself. All of those 44 people are working with beepers and are self-employed, and of course they do enough for cash that they stay under the $30,000 threshold, and all 44 of them are now self-employed.
So what you really have is, the underground economy is very much tied to the self-employment phenomenon. In developed countries, it's the burden of taxes and regulation. Probably in regional and rural areas and Third World countries, it's just because there's no economy there and it's the only way they can survive. They don't look in developing countries that these people are somehow evil in some way. They just don't have the economic growth; they don't have the uplifting of their economy when half their economy is engaged in taking each other's laundry in and out.
Mrs Haslam: Am I correct in understanding that self-employment -- I remember reading this someplace -- is where a lot of the growth will be in the future? That comes back to the question, do you think the networks are firmly established, or can we combat them in the future?
Ms Swift: I think some of them are firmly established. I know I was speaking to someone specifically about the tobacco thing recently. They were fairly knowledgeable about that aspect of things, and their view was, if the US does increase taxes, and if of course we don't any more, which hopefully we won't, but who knows? But say we don't and they do, they felt that, given the nature of the tobacco problem, it would just turn into an international smuggling situation. So the problem I guess with our shrinking world is that the US of course is still very much number one for us in terms of comparison, but it's not the only one. Anyway, like I say, that's not my area of expertise, but someone else who did know more about it thought that, which was interesting.
Mrs Haslam: We were looking this morning, and actually the Americans are the lowest on the list as far as their cigarettes and their taxes, and that's the problem. As the tobacco lobby said earlier today, if we shared a border with Germany, we wouldn't be in the problem of tobacco in particular as part of our underground economy. Because we are high on the list -- not the top, but because we're high on the list -- and Americans are on the bottom of the list and we share a common border, then that has exacerbated the smuggling of that particular product. But I'm more interested in the network.
Ms Swift: But we probably also would have been sitting here 15 years ago if we shared a border with Germany, in terms of underground economy.
Mrs Haslam: I'm more interested in the networks and whether we could combat them in the future or whether, once they're set up, they're set up.
Ms Swift: There's going to be an element of that, I think. Unfortunately our looking at the experience of other countries isn't that useful because we have only seen governments rely on enforcement and increasing taxation solutions. We've really never seen anyone scale back so that we can say, gee, did those networks diminish if the true causes were removed from the equation?
I do think the likelihood, barring economic catastrophe, is for a plateauing over the next little while, because we are looking at having some growth. If that continues and if government, I think, does change its ways so that people can have more confidence in institutions and don't see governments as just perpetually increasing taxes but as managing their money better in terms of deficits, debts and so on, then I think there is potential to gradually disband networks.
But it's a major impediment, because you're right. Once they're established, there's going to have to be a period of time before -- you don't break it up overnight. So I think again it's a long-term solution and it will involve an improved economy plus a change in government actions to dissolve it over a period of time.
The Chair: On that comment, I'd like to thank Ms Swift, Mr Bulloch and Ms Andrew, representing the Canadian Federation of Independent Business, for making your presentation before the committee today. Fortunately we didn't have anyone following you so we had an opportunity for some extra questions and we're grateful for that. Thank you very much.
Before the committee members leave, we do have just a little bit of business. Our research officer, Elaine Campbell, would like to respond to the committee on the question Mr Kwinter raised this morning with regard to evasion versus avoidance.
Ms Campbell: Mr Kwinter's question arose after he read the memorandum that was distributed to the members this morning. That summarized two reports on the underground economy. The question arose over the use of a word on page 2 of the summary. That was the summary of the Clayton Research Associates paper that had been done for the Canadian Home Builders' Association.
In the third paragraph, second line from the bottom, the word "avoidance" appears at the beginning of the sentence. Mr Kwinter asked for clarification on the use, and I imagine the intent, of that word. That is the word that is used in the report, in the particular section dealing with why renovators work on the black market. They also use some variation of that word as well as the phrase "tax savings." The word "evasion" does not appear.
Mr Kwinter: Mr Bulloch is still here; I notice that he also, in his remarks, talked about tax avoidance. My only concern is that there seems to be an impression in that article and the way people use it that tax avoidance is somehow or other a negative thing, whereas if you talk to any of the people in Revenue, they encourage tax avoidance; what they want to object to and what they do object to is tax evasion. Every citizen has the absolute obligation to avoid paying as many taxes as he can, as long as it's done within the regulations. Tax evasion is a criminal offence. It was just my concern that the particular report gave the impression that tax avoidance was a negative and was something that should be prevented. That was what my concern was.
The Chair: You did indeed raise this point before, and I would agree with you. I can't speak for all members of the committee, but --
Mr Mike Cooper (Kitchener-Wilmot): You can't speak for any of us.
The Chair: You're right, Mr Cooper. But let me tell you that avoidance and evasion, by definition, are two different things.
Mr White: They are, by definition.
The Chair: They are.
Mr Cooper: We'll accept that.
The Chair: This committee stands adjourned until next Thursday at 10 am.
The committee adjourned at 1723.