Letter to Minister of Finance Hon. Ralph Goodale: Budget Recommendations
March 8, 2004
Hon. Ralph Goodale, P.C., M.P.
Minister of Finance
140 O’Connor Street
Dear Mr. Goodale:
The Canadian Advanced Technology Alliance is pleased to offer its recommendations to the government as you prepare the 2004-5 budget.
CATAAlliance is the trade association which represents the Canadian high tech industry. We have almost 500 member companies, and a further 2000 companies belong to associations which are affiliated with CATAAlliance. Most of the companies are in the information and communications technology industries, but we also have members from the aerospace, biotech and advanced manufacturing industries. While the very largest companies, like Nortel, Cognos and CGI Group are members, the vast majority are SME’s. The markets in which our members compete are global, not local, so almost every one of them exports. Product innovation is the critical factor in global success, so only a few members do not perform R&D.
Our members believe that Canada will grow most rapidly if the government creates an environment which stimulates innovation, in all sectors of the economy. They believe that the right stimulative environment has four elements: a competitive tax structure; strong support for R&D; strong support for skilled human resources; and an efficient regulatory regime.
While the October 2000 tax reductions placed Canadian rates on a competitive footing with the United States, recent changes in the U.S. have moved them in front once again. CATAAlliance believes that Canada will continue to lose its best people, in all professions, if it does not reduce personal income taxes further. The knowledge economy remains the engine of growth. Canada must support and protect its most valuable resource, the people who create the knowledge. We recognise, however, that the state of the budget balance may not permit personal income tax cuts at this time.
On the corporate tax front, the government must accelerate the elimination of capital taxes. A five year reduction program for this destructive tax will not help to attract the investment essential to growth. Capital taxes are notorious for their negative effect on investment. There is no shortage of evidence on their baneful impact. In a 1996-7 OECD Economic Survey of Canada your department said that capital taxes cost $7 in output for every $1 collected, due to their detrimental effect on innovation and investment. Another Finance study, in 2001, warned the government that capital taxes discourage the very behaviour that the government was trying to encourage in trying to stimulate innovation and productivity in the economy. There is scarcely an economist in the country who does not recommend their elimination. Immediate abolition of the tax is called for.
Strong support for R&D is a key ingredient of economic growth. The Scientific Research and Experimental Development tax credits have played a significant role in stimulating R&D in many industries, not just high tech. It is an excellent program, but it should be improved. Companies which do not qualify for Canadian Controlled Private Corporation status cannot get their credits if they are losing money, which denies them an important incentive just when they need it most. This is seen as a problem of large companies, but that is not correct. It effects many small ones when they have foreign venture capital, when they have issued shares to the public, or simply due to investment by their owners in other companies which use the credits. This problem must be corrected in the next budget.
A truly viable solution is to allow the credits to offset all other Canadian taxes, for example the GST or EI premiums owed by a company. In the current global economic climate, when the competition for investment is intense, an immediate change is needed. A detailed paper on our SR&ED proposals is enclosed.
CATAAlliance members believe that the single most important investment the government can make in Canadians is support for education. The government deserves praise for the major contribution it has made to post-secondary education in recent years. The Canadian Foundation for Innovation, Millennium Scholarship Foundation, Canada Research Chairs and Canada Graduate Fellowships are excellent programs. We encourage the government to continue to expand them and the student loan programs.
Lifelong learning is essential in the knowledge economy. The government must continue to help Canadians to improve their job opportunities by raising their skills. Human Resources and Skills Development Canada must seek attractive, efficient ways to deliver training and education to all Canadians.
Financial resources to fund greater spending in these areas can best be found by reallocating budgets from other programs. They may already have met their objectives, or the passage of time and changes in priorities may have rendered them redundant. CATAAlliance commends the spending review which is now under way. We urge that it be pursued with great rigour, so that it will achieve its aims.
Minister, we believe that you have an opportunity here. Resisting calls for increased spending will allow economic growth to create the budget surpluses which will allow further across the board tax reductions, which in turn will stimulate more growth. If you would like to discuss our position, please give me a call.