As part of the DNEE, a committee of six individuals should be appointed from outside the government to report directly to the Minister of Finance and the Prime Minister. These individuals should be accomplished in business and getting things done under pressure. Getting things done is the key phrase here. This small committee would be the nucleus of the restructuring initiative. Just as in the last war, we relied on Beaverbrook and others to fight for the national interest as dollar-a-year men, I envisage this committee being composed of individuals who have the nation's best interest at heart and are not afraid of leadership.

Their prime objective should be to get spending under control as quickly as possible and institute the 5% a year reduction in spending over the next five years. How they propose to do it would be their judgement call but their appointment should only be made on the understanding that their recommendations will be received and acted upon. This is not a Royal Commission to delay action; this is a commission to act immediately with the full force of the government behind them under a DNEE.

Here is a short list of immediate steps that could be taken right away to reduce spending.

1. All government salaries over $30,000 should be reduced by an immediate 15%. No exceptions. M.P.'s and Senators as well. Although it is difficult to get a handle on the ratio of salaries to total government spending, I estimate salaries account for 40% of total spending and this means an immediate reduction in annual spending of at least $7 billion. There will be those who immediately react and say removing this spending power from the public sector employees will fuel the downturn even more. It will not because these savings must be immediately recirculated as tax credits to get the private sector economy moving as I will point out below, so the spending power is just re- distributed. Two, the cost of government is reduced immediately which must be done.

2. All pensions being paid to individuals under 65 years and who are gainfully employed in another position either in government or the private sector are to be cut immediately without exceptions. People who are not gainfully employed under 65 will be placed on unemployment insurance for one year just like any other Canadian. This will end the endless debate on M.P.'s pensions and double dipping at the stroke of a pen. It is basically unfair for government workers to ask ordinary Canadians for benefits not available to all.

3. No new capital expenditures over $50,000 are to be made by any department without review by a special committee set up to monitor the necessity of capital spending. There is a surfeit of government buildings and offices, computers and laser printers. It is time to reign in the madness such as we recently learned (August 1993) when a government functionary ordered the disposal of $250,000 worth of word processing software still in the packages.

4. Government travel and entertainment. We cannot afford junkets at home and abroad and even if they are made in the name of trade promotion. It is not my objective to single anyone out but we just don't need these expenses given the circumstances. Private business has cut back and so should government. Real leadership demands an end to this waste until we get our house in order.

These four items can be implemented within 24 hours of a DNEE and their implementation will immediately signal to all Canadians that the government is determined to get its own spending under control. Any private business immersed in red ink to the extent of the government would do no less.

The government should then move forward to put in place the following programs. 5. Implement the modifications to the GST dealt with in Chapter 5.

6. All grants, loans and subsidies to private business should be cut immediately and replaced by broad tax incentives. See Chapter 6.

7. Implement amendments to exempt the taxation of capital gains dealt with in Chapter 7.

8. Implement modifications of investment criteria for RRSP plans dealt with in Chapter 8.

9. Implement a Canada Works Plan outlined in Chapter 9.

10.Implement the accumulated debt reduction plan (ADRP) outlined in Chapter 10.

11.Implement a fair trade program to replace "free" trade and encourage competition. See Chapter 11.

12. Canadian Travel Tax Credit outlined in Chapter 12

Chapter 5

Generating immediate activity through tax credits.

Idle money serve no one. Money must be circulated within an economy to take advantage of the special nature of our banking system and fractional reserves. An expanding money supply through re-lending of deposits and consumption is what we need to aim for. Put the incentives in place and you will arrive at that objective. A DNEE will have the impact of a glass of cold water in the face. If it is enacted with the proposed immediate and serious cuts in government spending, there exists the window of opportunity for fiscal action to re-store growth to the economy.

Our dollar is hitting new lows (August 1993) as I write this. Our interest rates are at the lowest levels in twenty years, yet borrowing is not taking place anywhere near the levels these interest rates should stimulate. Why? We are stagnating because the consumer like the government is bankrupt. The enormous tax increases whether they be direct income taxes, real estate, property and school taxes, or sales taxes like the GST have impacted the consumer to the point where the actual real disposable income for discretionary expenses has been declining for some time. All these taxes have finally come home to roost.

How do we encourage Canadians once again to begin spending to start the cycle of economic expansion? As long as lay-offs in the private sector continue to bombard the nightly news and the uncertainty of the direction the economy is going to take is unclear, Canadians will remain adrift in a sea of indecision. They desparately need encouragement. Encouragement by and through leadership. Once people sense that a new policy shift has really taken place and it is no longer business as usual, it can have a surprising effect on the behaviour of people. We have been subjected to conflicting messages for so long. We have lost direction in a global economy we really do not understand. Our leadership tells us to prepare for unprecendented competition, yet at the same time plagues the private economy with a tax structure designed to crumple it. Small wonder that the average Canadian heads for cover. It is not the way to build and grow an economy.

Ravi Batra, the noted American economist, said in a CNBC television interview in 1990 that an economic depression was first and foremost a depression of the mind. Nothing could be more true. Canadians need to be encouraged. Once they sense that government is really changing and cutting spending with the consequential reduction in tax burdens, it will have enormous impact on the psychology of the situation. Life is always uncertain, but most people do look forward into the future and attempt to materialize their hopes and dreams. It would be a bleak existence if we could not look forward to better times and that is exactly what plagues us now.

If we cut spending through the first measure of salary rollbacks, we can easily afford to institute a sales tax credit for durable goods to get consumers spending. A DNEE with an immediate rollback of sales taxes on autos, furniture, homes and other durables through a tax credit on filing in 1994 would have an immediate stimulus to spending. People have to be encouraged to spend. Sales tax rebates are an ideal fiscal measure to do this. Notice I have not said repeal or eliminate the GST, which I will deal with next. I am proposing a tax rebate in the form of a credit against your income tax. There is a reason for this. Many of us are faced with the reality of lower interest rates on savings thus reducing overall income. This has a double impact on behaviour. People stop spending because of fear and what they perceive their future income prospects are. Low interest rates might encourage some to buy a house but low interest rates discourage a lot of people from spending because after taxes they have still less to spend. They must be encouraged and a tax credit is an easy and fast way to get money flowing.

In the following pages, I will have much to say about using the tax system to encourage Canadians to better themselves. For too long the tax system has been a complex and mysterious structure to the average Canadian. It has benefitted those fortunate enough to have the lawyers and accountants at their disposal to work the myriad schemes available. I propose a major overhaul in the system with simplification the objective and incentive oriented policy at the core with a minimum of complexity. In plain English, you get a break when you do something that helps the economy grow. Canada needs investment and savings. Canada also needs to encourage consumption. It is a double edged sword, yet surprisingly we can use the tax system to achieve both ends.

Modifications to the GST.

The GST. We can all admit this is perceived as a hated tax for whatever reason. If it had been implemented in a different fashion on a graduated scale, the perception might be totally different. It did replace a 13% federal sales tax that was hidden and was applied to a far more narrow range of manufactured goods. Our luck is that the GST was introduced just at the time the economy was entering into a recession and services were becoming a greater part of the economy. The manner in which it is collected through the enforced enlistment of millions of small businessmen has resulted in the enormous hatred of the tax.

I wrote Michael Wilson at the time and said that as far as I was concerned the manner in which it is collected and the range of services it was to be collected upon, would give enormous impetus to the underground economy. It was obvious that a tax on untraceable and objectively non-quantifiable services was completely unenforceable on any reasonable basis. The door was opened for fraud on a massive scale. I was right. Canadians by and large respected their tax system up until the GST was implemented. It soon became apparent as to how easy it was to avoid paying GST on services either through barter or off book transactions. It legitimized tax evasion in the minds of millions of Canadians even though the evasion is illegal.

If the government wants to make tax collectors out of millions of ordinary citizens who want nothing more than to get on with their lives in peace, then it has another thing coming. Whereas a major part of my income is derived from paper transactions that I cannot hide-investment income, bank interest etc., I am certainly not going to quibble with the carpenter if he will work for me for $15 an hour off the books than $35 on the books. Therein lies the stupidity of the way the GST was structured. The old federal sales tax was collected against traceable manufactured goods. Goods that simply could not be hidden from the tax man. However, millions of service workers, part time and full time can go off the books if they are not making anything traceable.

In the end because they go off book to evade the GST, these people also now are off the books in terms of income taxes as well.

Less any politician or economist try to deny this is happening on anything less than a massive scale, it is common knowledge in Quebec that 50% of home construction and renovation is off book. If you leave cash at a restaurant anywhere in the Laurentians instead of a credit card, the GST is not billed. More and more transactions are going off book, whether it is through billing at reduced rates to prove a transaction and then with partial payment in cash as well to make up the difference or out and out evasion through seeking work for cash, this has major implications for the respect we all have for the tax system. Garth Turner can go red in the face appealing for compliance but most Canadians just do not feel that evasion of the GST has anything to do with their perception of themselves as honest citizens. About a week after I had written the above, a good article appeared in the Montreal Gazette which I have included in the appendix outlines the views of the head of the Quebec Manufacturers' Association.

How do we change it?

A Goods Tax Without the Services.

I propose that the GST should be amended from being a goods and services tax back to being a tax applied only to those commodities that are actually unit traceable in the economy. In other words, make it a goods tax again and get it off services. If we want to tax services we have to do it on the income side and not on the consumption side. In fact because services are an expanding part of our economy, it is better to encourage the above board use of services and tax them on the income side. We will get far better reporting of economic activity as well.

That is how I would deal with the GST problem and it is a solution that I have not heard from anyone else. The government of the day made a bad judgement call attempting to throw an enormous net over all items in the economy no doubt motivated by its need for revenues to create the operating surplus. It has got less than it actually thought it would, and it is time to change the system. Going back to a goods tax even if at a higher rate is preferable to the present system. In fact, I would eliminate the value added nature of reporting the tax completely as it is incredibly costly in terms of paperwork and it is open to massive fraud. False invoices can be presented for refund. Has the Department of Revenue ever contemplated how they could verify the billions of invoices in the system. The problem with possible fraud is not even discussed.

I would go for a straight federal sales tax at retail point of sale on manufactured goods period.

Chapter 6.

Investment Tax Credits.

I want to propose a complete overhaul of the way government tries to encourage investment. For anyone who has taken the route of going after a government grant, subsidy or loan, it is an eye opening experience into the vagaries of decision making and bureaucracy at its best. Any system that calls for subjective decision making on the part of bureaucrats in assessing the merits of a given investment proposal is wrong in a free market economy. This is an area of government activity that I would eliminate on a wholesale basis. The only rational basis for deciding who gets a break must be totally objective, above board, and open to all.

First of all, the opportunities for fraud again are enormous. We have had convictions and we presently have court cases pending aginst M.P.'s for alleged shakedowns or kickbacks. Where large subsidies or concessions are made such as to multinationals, there exists the possibilty of having our politicians being bought lock, stock and barrel. It is a simple matter to place a million or two into a Swiss account for the benefit of a politician or bureaucrat when all he has to do is persuade the provincially owned power supplier or some other agency to offer an incentive that will bring the investment to his province. The Paris, London or New York apartment is available and the possibility of a fat consulting appointment after political life is always attractive. This goes on and we all know it. Secret deals that have to be forced out into the open through the Quebec legislature have no place in my idea of a fair and open marketplace. It is time to put an end to it with a complete overhaul of our system of investment incentives.

Regional development grants bring out the worst in many cases. The list is long-Bricklin in New Brunswick is a classic example. Industry should not be motivated to locate on the basis of a grant. It should only make the loaction decision on sound business rationale-close to markets and suppliers and raw materials and a skilled labour force. Drawing industry to out of the way locations is self- defeating. It eventually fails and no one benefits.

Those areas of the country like the Maritimes that do not have ready market access for manufactured goods would be far better off investing in new knowledge based development than in plants and manufacturing facilities.

How then do we do this? How to we restructure the whole field of grants, subsidies and loans to eliminate the possibility of fraud and drawing industry to locales it should never go in the first place? We do it by offering a system of above board, pre-established tax credits against future profits. In this way, we ensure that the decision to invest is made only on the assumption of future profits and it is not a scheme to defraud the government of money up front. This will eliminate most of the fraud but more importantly, it will eliminate any investment that isn't good to begin with. We ensure honesty by eliminating any possibility of politicians and bureaucrats putting the touch on the investor or vice-versa. We ensure long term commitment. The government has no money invested or guaranteed. The only investment the government has is a contingent asset- an investment in the future profit stream if the venture is successful. The government is willing to forego part of the future profit stream as an incentive to get the company to invest. This is a very different approach from the massive contingent liabilities already accumulated by our governments both federal and provincial in the field of industrial development. Presently the situation is such that if a venture fails, it is the taxpayer, more than likely who ends up funding the loss.

Meanwhile, the government is assured of economic activity, of employment creation and income tax collection on these employees etc. It is simple. It is effective. But most of all, prudent and honest businessmen prefer above board open incentives offered to all so that there is no possibility of favoritism or croneyism in the decision making process.

Certain municipalities are already in on this act by offering property tax breaks for new home construction and it is working. There are all sorts of creative ways of designing these incentives but the most important points to keep in mind is that they are open to all, they are above board, and they do not cost the government anything up front. It is the way to go and it is a way to eliminate a whole government department and field of activity that should never have been created in the first place.

What rates and incentives should be offered? The possibilities are many and I will just mention a couple of ways to do it. We should keep in mind that multinationals especially can manipulate their bottom line profits either through transfer pricing or managment fees etc. to have very little profit. Offering an income tax credit to them of say 10% of the investment may not be as attractive as saying we will offer you a payroll tax credit of 20% of the investment. In this way, the incentive becomes attractive in another way. Like any good business, the government should become customer oriented and offer the tax credit incentives in a range of forms. Either as an income tax credit, a dividend tax credit, a payroll tax credit, an energy tax credit; the point being that every industry has different scales of investment in terms of capital and labour, and paybacks may vary from immediate income generation to several years continued outflow of investment before profits come on stream. In this way we can help knowledge based industries to develop as well. If you create jobs, a payroll tax credit would apply.

The gist of the matter is: make an investment of any type and we will give you the credit of your choice. Investment means jobs in the long run for the Canadian economy.

Other Deductions as Incentives.

The present tax code that deals with CNIL (Cumulative Net Investment Losses) is Greek to me even though I have a Masters in Business Adminstration from Cornell. The standing joke when this whole area appeared in the tax code that CNIL stood for the Cayman's National Investment Line. It was better to get your tax paid dollars out of Canada and make them disappear than to try and deal with a tax code that made no sense at all. The complexity of how to treat investment losses is a nightmare and I am sure it has led to more than one complex and time consuming objection at the Revenue Department.

Let's get rid of the sham. Let's make it real simple for all of us. If you make an investment in the reasonable expectation of making a profit, all losses either capital or income losses in early years should be deductible against any other income. Stop differentiating income. A dollar is a dollar is a dollar. If it is invested, it is working in the economy. The objective is to get it invested. If the government adopts a policy of letting people invest how and where they want to invest, I can assure the government that taxpayers by and large are not stupid and they will invest in the best places-the bricks and mortar and machinery of factories, apartments and houses. Differentiating between sources of business income and losses is just a pointless exercise in complexity. Simplify. If I am hard working doctor with a large cash income and I want to build an apartment building then give me the ability to write off the early losses against my cash income from doctoring. If I take $100,000 of equity and $900,000 of bank debt to build the apartment building I am creating economic activity way beyond the level of just taking my $100,000 and putting it in a mutual fund that may very well be investing 100% of it overseas! Worse still that doctor may just take the $100,000 out of Canada himself and put it in the Caymans or someplace else and the taxman here never sees it again. It is time we smartened up!

To give you an example of where truth meets fiction in a way that demonstrates exactly how private investment suffered in the 1980's compared to public spending, I have compared the total amounts of new issues of corporate common stock, preferred stock and corporate bonds in the 1980-88 period and the new issues of debt every year by the federal government. This is a lesson in leverage being placed upon the private sector. About two years after government borrowing accelerated, corporate debt also balooned.

End guarantees. The government is on the hook for all sorts of things it should never be involved in. A case in point: export development. Leave this to the private sector. Rather than just guaranteeing exports, the EDC has become actively involved in promoting all sorts of exports that we should not be involved in to begin with. Mr. Jean Chretien has recently proposed a program whereby the government will request that the banks not take personal guarantees from small businessmen and the loans will be guaranteed by the government. This is a proposal equivalent to the situation that the savings and loans got into in the United States. The government guaranteed the deposits so it didn't matter if you made bad loans, the government would be there to pick up the loss. This typifies for me the paucity of imagination in new policy iniatives coming forth. Personal guarantees ensure personal commitment and form an essential part of our contractual common law history. The government has no place in this area. Let the banks assess the risk and apply the premium. It's simple logic. If the deal isn't good enough for a private underwriter to assume the risk, it certainly isn't good for the taxpayer.

If the objective is to get money working, to get people taking risks, to create judicious leverage in the economy, then this is the route to take. I am going to devote an entire Chapter to my next topic Capital Gains Taxes.

Chapter 7