The Department of Finance The View from a “Reformed Smoker” Alexandra MacLean

Contents Structure Role Culture Tax Policy Branch Tax policy and legislative process Tax policy orthodoxy Tax incentives Disadvantages of tax incentives Loopholes – why are they so hard to close? EDCF & Social - direct expenditure programs Why are Budgets the main policy tool for the Government?

Department of Finance: Structure Minister of Finance Economic and Fiscal Policy Branch -Budget & fiscal forecasting Economic Development and Corporate Finance Branch –Business & economic 2 pagers and MCs Federal-Provincial Relations and Social Policy –Social policy 2 pagers and MCs Financial Sector Policy Branch –Banks & insurance companies International Trade and Finance Branch -Close to GAC Tax Policy Branch -Policy & legislation tax 2 pagers Law Branch Corporate Services Branch Consultation and Communications Branch

Department of Finance: Role Primarily responsible for providing the Government of Canada with analysis and advice on the broad economic and financial affairs of Canada. Responsibilities include: Preparing the federal budget. Preparing tax and tariff legislation. Managing federal borrowing on financial markets. Administering major federal transfers to the provinces and territories. Developing regulatory policy for the financial sector. Representing Canada within international financial institutions.

Department of Finance: Culture Demographics and recruitment Experience/Inexperience Red meat economics Technocrats Analytical criticism vs. creative solutions

Tax Policy Branch: Structure Sales Tax Division Business Income Tax Division Personal Income Tax Division Tax Legislation Division Inter-governmental Tax Policy, Evaluation and Research Division

Tax policy and legislative process Main methods to achieve a tax rule change: Budget Bill Tech Bill Press release announcement (less frequently and later inclusion in a bill) Generally no cabinet committees, no MCs No role for TBS - no submissions (except CRA side and regulations) Limited role for Justice – Finance in-house lawyers PCO interest & role generally limited to broad themes, headline measures, off the rails files Concentration of Responsibility

Tax policy orthodoxy Efficiency, neutrality, simplicity, fairness Broad base, low rates Characteristics of efficient taxes Few exceptions Simple rules Withholding at source ideally by a business GST/HST Personal income tax on employment income

Tax incentives Line department typically views as costless Politically attractive, stakeholder pressure Finance officials perceive in essence a mandate to oppose

Disadvantages of tax incentives Non-neutral, picking winners Complicated and inconsistent with basic revenue-raising tax system objective CRA as gate keeper Loopholes, abuse, targeting Cost is difficult to quantify Effectiveness is difficult to measure Expensive and inefficient Everyone has an important policy objective

Loopholes – why are they so hard to close? Powerful and effective lobbying by business and advisor community Income trusts Private corporations Public mostly not interested or engaged Not fully conscious of link between loopholes and their own tax burden What is the political upside? Cycle of inertia Reluctance to address allows issues to grow which in turn makes it more risky and difficult to address

EDCF & Social - direct expenditure programs Economic Development & Corporate Finance Branch Microeconomic Policy Analysis Division Sectoral Policy Analysis Division Federal-Provincial Relations and Social Policy Branch Federal-Provincial Relations Division Social Policy Division Similar basic ethos Basically similar dynamic as with tax incentives, but in the interdepartmental cabinet committee context.

Why are Budgets now the main policy tool for the Government? Budget announcements normally get delivered Source of funds sorted out MC/Cabinet committee process is slow and cumbersome Budget legislation has a clear path to implementation