The Fraser Institute: Tax Reform in Canada:  Our Path to Greater Prosperity

A Fraser Institute Conference,
October 11, 2001, Toronto, Ontario, Canada

Opening Remarks

by Herbert Grubel

I welcome you to today's conference personally and in the name of the Fraser Institute. Thank you for coming.  I hope that you will have a fruitful and enjoyable time.

My first task is to acknowledge the contributions of others in making this conference possible and successful.  The John Dobson Foundation of Montreal has given generous financial support.  John Dobson has shown much personal passion for the creation of a better tax system in Canada.  Without John's financial contribution and personal dedication we would not be here today.

I also want to thank all of today's speakers.  They have spent many hours researching and writing the papers they are about to present.  It is obvious that their work is the very foundation of today's conference.

I also thank Lorena Baran, Events Coordinator of the Fraser Institute, and her able staff, for the fine professional job they have done with the myriad of logistical details that are essential to make a conference successful.  If you have not yet met Lorena personally, you will recognize her as the person who is constantly on the move this morning, assuring that everything is going according to plan.  If you have any questions not yet addressed in the emails sent to you, feel free to speak to her any time.

Today's program brings a first in Canada.  Mike Walker, executive director of the Fraser Institute and Jack Mintz, president of the CD Howe Institute, after lunch will share the platform and each will present a paper, outlining their views on the future direction of government spending and tax policies.  I hope that this joint effort is the beginning of many more cooperative endeavors between the two leading think tanks in Canada.  There is much work to be done, the influence of which will surely be increased through the joint endorsement of these institutions.

Canadian think tanks have an important role to play in Canada.  Through their research and publications, they push the policy envelope, to use a currently popular expression.  They help to shape the direction and nature of public policies of great importance for the welfare of Canadians.

The authors of the think tank research are in a good position to do their work effectively.  They are not constrained, as politicians are by the risk that their policy ideas upset the Prime Minister's office and cabinet or stock markets and exchange rates.  They do not have to be weary like bureaucrats of getting their political masters into trouble.  They do not have to worry about meeting often-arcane standards of academic excellence, which tend to reward rigorous more than relevant analysis.

Free from these constraints, think tanks work on several margins.  They set goals for government policies and develop strategies to reach them.  Through public education they help to shape opinions and attitudes among voters so that politicians can take up the causes with less fear of political retribution at the ballot box.

I believe that it is important to note that the work of all think tanks of necessity has an ideological perspective or, as some would say, ideological bias.  This is true about the work of leftwing think tanks as much as it is about the work of the Fraser Institute and CD Howe Institute.  I think that we should be honest and up front about this perspective. Without it our work would lack direction – one cannot see properly without having a perspective.  We at the Fraser Institute believe that the economic and social welfare of Canadians is best pursued in a world of personal and economic freedom.  We believe that the burden of proof about the merit of government intrusion on our lives is upon those advocating it.

Because of our goal to push the envelope, the work of the two think tanks is often considered to be politically unrealistic.  This should not bother us.  Our job is to shape political reality, to allow politicians to pursue policy goals that are in the best interest of Canadians in the longer run, even if they encounter public resistance in the beginning.

Several of the papers presented today should be seen in this context.  It is almost certainly not politically realistic today to recommend the adoption a flat personal income tax, the abandonment of the capital gains tax, according equal treatment to the mining and all other industries and increasing sales and value-added taxes while lowering correspondingly personal and business income taxes.  What is important is that all of these and other proposals marshal sound economic theory and empirical evidence to show that the proposed policies result in a superior economic outcome for Canadians.

New theoretical and empirical knowledge forms much of the basis for the papers we will consider today.  By and large, these new insights were not available when the existing policies were first designed.  The new knowledge implies that many existing policies are no longer optimal, even if they have been modified many times.  The same revenue goals can be achieved at lower economic and often social cost.

The concept of the marginal efficiency of taxes is a cornerstone of this new knowledge.  This concept relies on the important fact that the imposition of any tax induces the taxed to change their behavior through time.  High marginal taxes induce workers to work less and enjoy more leisure.  These high taxes also induce them to shift their efforts into the unmeasured and untaxed household or underground economies.  Savers, risk takers and domestic and foreign investors, who are so important for economic progress, similarly change their behavior in order to avoid high taxes.  In the process they reduce capital formation and innovation.

Empirical studies using the concept of the marginal efficiency of taxes have shown that the ability to avoid taxes through induced changes in behavior is different for different types of taxes.  This empirical information underlies the arguments in many of the papers we will hear today and leads to the conclusion that the present system of taxation should be replaced by one, which can raise the same amount of revenue at lower economic and social costs.

Another new strand of knowledge is based on the increasing perfection of global capital markets.  The new, quick and efficient flow of information causes investors to be more than ever concerned about after tax returns on their assets, readily shifting funds from high to low tax jurisdictions.  Canada has a large wedge between the before and after tax rates of return on capital.  There are multiple layers of taxation.  First the business income is taxed, then the dividends paid out of this after tax income is subject to the personal income tax.  If the owner of the business realizes capital gains, they are taxed also.  Adding insult to injury, a few years ago Canadian jurisdictions have created a new capital tax that is payable whether or not a firm has profits.  Several papers today explore how this multiple taxation of capital in Canada causes economic growth to suffer.

Computers, new data and econometric techniques have made available bits of knowledge important in the assessment of existing taxes.  For example, Christopher Sarlo in some Fraser Institute publications has produced powerful new evidence on income inequality in Canada, showing that true poverty is much less than is implied by the headline grabbing measures of relative inequality.  He also shows that lifetime inequality is much less than is suggested by the static measures used widely.  Panel data in the United States and Canada show that there is a surprising mobility of people between income deciles.  In the light of this new empirical evidence on income inequality, the case for income redistribution and high marginal income tax rates is much weaker than it had been when Canada's progressive tax system was first designed.  The new view on income inequality enters several papers explicitly.  It is implicitly relevant for others.

The availability of new statistics and computing facilities has shed new light on the incidence of capital gains taxation.  Contrary to the widely held view that the tax is paid 90 percent by families with incomes over $100,000, in fact families with incomes other than capital gains below $50,000 pay over half of the tax.  In addition, there is new evidence from countries that do not have a capital gains tax, which shows that revenue authorities are able to limit tax arbitrage without excessive administrative and legal costs.  A final important piece of new knowledge in the field of capital gains taxation comes from Switzerland, where the removal of the tax in some cantons caused their income to jump by 3 percent while cantons that retained the tax remained on their traditional growth path.

Case studies of the effects of lower taxes and tax reform will be presented this afternoon.  These studies offer new information directly relevant to the policy recommendations made in the more conceptual papers presented this morning.  These empirical papers show that the proposed policy changes can be justified not just on the basis of theoretical reasoning and selected pieces of new empirical information.  Other jurisdictions have acted as laboratories for the testing of the entire package of policy initiatives contained in today's papers.

Let me conclude my introductory remarks on an optimistic note.  Many of us working with think tanks have learned what happens when we recommend policies that challenge the existing regime and conventional wisdom.  At first, the policies are considered to be politically unrealistic.  Often they are called "extreme", which is the ultimate put-down in Canada where we pride ourselves in having a monopoly on the soft middle ground.

However, eventually, the public accepts our policy recommendations because they understand how they would benefit from their adoption.  This understanding arises partly from our own educational efforts and partly when policy pundits and politicians take possession of our ideas and run with them.  The final and decisive public education often takes place when a party incorporates the policy proposals in its election platform and campaign.

Most of us in think tanks accept without resentment the reality that we are given public credit for introducing the ideas only very rarely.  We take with more or less grace the public abuse heaped upon us during the first phase of the process just outlined.  Throughout the process we content ourselves with private and confidential hints from politicians and bureaucrats that they had welcomed our forays into the politically unrealistic.

I hope that the same will be said about the new ideas for tax policies presented at this conference.  However, we should be mindful of the fact that taxation, more than most other policies is very complex, involves many interdependencies, historic legacies, empirical uncertainties and value judgements.  The individual papers presented today do not deal with these complexities and with only very few of the interdependencies of the separate proposals.  No think tank or conference can come up with a complete package of tax reforms, taking account of all of the new knowledge, integrating and examining its complex ramifications.

It is my hope that the ideas presented today will wake up the government to the need for a comprehensive reexamination of Canada's complete system of taxation.  I do not know how this can best be done, but in the past the job has fallen on Royal Commissions.  I am confident that our work today will show that such a Commission has a wide open opportunity to recommend tax reforms that will pave the way for greater economic growth and prosperity for all Canadians.

Let us get to work.  The first paper is...

[Contents]

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