After more than 400 written submissions and countless hours of discussion with business and social groups, tax experts and concerned citizens, the Commons finance committee will soon complete its response to the federal tax reform proposals.
The committee, headed by Tory maverick MP Don Blenkarn, will likely have much to say.
''In terms of the totality of the thing, it's a pretty good reform,'' Blenkarn says. ''But there are a lot of little things that are a screw-up.''
The finance committee has staked out strong independent positions in the past, as in its searing analysis of the government's green paper on regulation of the financial industries. It has devoted exceptional time and effort to Finance Minister Michael Wilson's tax reform white paper, identifying 130 issues for consideration.
One principle that will stay firmly in place, Blenkarn maintains, is revenue neutrality. Any recommendations that would reduce the tax take will have to be balanced by revenue increases.
The committee expects to submit its report in early November. The government will follow with a ways and means motion later in the year, and tax changes are to be effective from Jan. 1, 1988.
With so much material at its disposal, the committee faces the challenging task of separating the chaff of self-interested whining from the wheat of substantive proposals in accord with tax reform's basic objective: a fairer, simpler system that does not distort economic behavior.
While most submissions to the committee support the basic thrust of reform, all find fault with specific measures. Few are opposed to lowering personal and corporate tax rates. But almost every other proposal nettles at least one respondent.
Business complains that the white paper ignores the federal deficit, raises the capital gains tax too high, does not lower personal tax rates far enough, and cuts back too hard on ''incentives'' to invest.
Social groups declare that the proposals do too little to help the poor. Organized labor finds the tax cuts for low- and middle-income taxpayers meagre, and recommends a significantly steeper rate progression, with much higher top rates.
Tax professionals are as divided as the interest groups. ''Our income tax systems did not require major reform,'' says Robert Dart of Price Waterhouse. Nor, in his view, are we getting it.
Osgoode Hall law professor Neil Brooks called the proposals ''half-hearted at best,'' adding: ''It puts us on the path of tax deform, not reform.''
Among items of concern to business that attracted most attention during the committee's hearings: - Inflation indexing. Groups of all political persuasion agree that the government should fully index the tax code. On the personal side, the present system of indexing only above 3% would wipe out tax reform's savings for lower- and middle-income taxpayers within a year or two.
Corporate tax experts, meanwhile, warn that without indexing, a resurgence of inflation will open the door to innumerable ad hoc adjustments. In particular, they argue indexation is the necessary companion of tax reform's linchpins: reducing the preferential treatment of capital gains and lowering capital cost allowance rates. - Capital gains. Small business and farm organizations are delighted to see their $500,000 exemption preserved. But the securities industry argues that the white paper's move toward fuller taxation of capital gains will shift the balance ''in favor of dividend and interest income and away from capital gains.''
CRITICIZE PROPOSALS
The industry also says retaining the full $500,000 exemption for private companies, while excluding public companies from this privilege, ''will deter private companies from issuing shares to the public and may encourage smaller companies to go private or delist.''
Labor and social groups, on the other hand, criticize the proposals for not going far enough in taxing capital gains at the same rate as other income.
The dilemma facing the committee is that the white paper's capital gains proposals are a patchwork of political compromises. Any redesign will affect other parts of the package, including the distribution of tax cuts between high- and low-income taxpayers and total government revenues. Ottawa will thus be loath to consider major changes in this area, though it may accept minor modifications to appease specific interest groups. - Personal tax rates. Business groups are disappointed that the top personal tax rate in Canada will remain higher than in the U.S. The Fraser Institute economic think tank recommended capping the top federal rate at 23%, rather than the 29% Ottawa proposes. The Canadian Labour Congress, however, finds the reduction in top personal rates a ''discouraging trend.''
Several finance committee members appear to be dissatisfied that the proposed rate structure does not lighten the burden further for middle-income earners.
Again, it is unlikely Finance will accept changes here. Even mino r rate adjustments have a major impact on revenues. A one-point decrease in the 17% basic rate cuts annual federal revenues by $2.7 billion, while a similar change in the 26% and 29% rate brackets loses about $500 million and $200 million respectively.
To offset revenue drains of this order would require a major broadening of the tax base. As a political proposition this would be, as they say, ''courageous.'' - Capital Cost Allowances. While applauding lower corporate rates, business groups dislike offsetting cuts in depreciation allowances and other measures which broaden the corporate tax base.
The loudest critic of CCA cutbacks is William A. Macdonald, of Toronto-based law firm McMillan Binch, who calls tax reform an attack on manufacturing investment and on ''Canadian equity formation.''
INTERESTING PROPOSITION
The committee may recommend that the present accelerated capital cost allowance be spared - but the special lower tax rate for manufacturing be bumped up from 23% to the standard corporate rate of 28%. Blenkarn made this suggestion to manufacturers appearing before the committee, and calls it ''an interesting proposition.'' - Consumption tax. Business would have been greatly assuaged had the government provided a firm timetable for replacement of the federal manufacturers' sales tax by the multi-stage sales tax.
The new tax is expected to strengthen the competitive position of Canadian manufacturers, reduce the cost of capital investment in Canada, and provide additional flexibility to tackle the federal deficit. But business remains skeptical that the government will ever proceed with sales tax reform, particularly when faced with the emotional opposition to taxing food.
Interim measures - such as the 10% telecommunications tax and the proposal to make marketing firms with links to manufacturers liable for the tax - are especially unpopular.
The telecommunications tax, designed largely as a revenue gap-filler, will likely go ahead as proposed, with a few technical changes. The marketing company proposal serves to deter tax avoidance through the use of artificially low transfer prices for sales from manufacturers to their marketing subsidiaries. The potential revenue loss will make the government extremely reluctant to drop this provision. - Antiavoidance. Business and tax professionals alike have reserved their heaviest fire for the white paper's proposed general antiavoidance rule. Although a similar provision has been in place in Britain and the U.S. for years, the rule was described in submissions as ''obnoxious,'' ''an abject confession of tax structure failure,'' and as ''introducing an unprecedented and unacceptable degree of uncertainty into Canada's taxation system.'' - Car allowances. The cutback on depreciation claims for those who chalk up less than 90% of their mileage to business use is criticized as arbitrary and unfair. Traveling salespeople are especially upset. Many drive 20,000-25,000 miles each year on business, yet still do not meet the 90% test.
MPs on the finance committee are sympathetic, and will recommend changes. ''It's ridiculous to treat the guy who drives his car 80% for business the same as the guy at 20%,'' says Blenkarn. - Families with children. MPs have had an earful from their constituents about the impact of tax reform on middle- and upper-income families with children.
Savings for this group from lower rates are almost completely offset by the conversion of personal and dependants' exemptions to credits. Their income also makes them ineligible for the child tax credit. And this group has seen the value of child benefits (family allowance and children's exemptions) eroded over time.
Blenkarn says the committee wants changes to ''give more money to families.''