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Zero debate on zero per cent

July 26th, 2012

The public part of Tuesday's city council meeting ended on a rather awkward note, as Mayor Joe Fontana acknowledged that council had not followed proper procedure on an earlier vote on the tax levy target for the 2013 budget. This was the vote on whether the target for the 2013 budget should be a zero per cent tax increase.

At the outset of the meeting, before any debate on the tax levy motion itself (the main motion), councillor Dale Henderson made a motion to "put the question" on the taxy levy, which means ceasing to debate the motion and moving immediately to voting on the motion. This is a common procedural tactic in deliberative meetings, often employed after an extensive debate, when the participants are starting to repeat themselves. However, since it puts an end to debate, it requires greater than a simple majority support to pass. According to the the council procedure bylaw, which governs council meetings, such a motion to put the question requires at least 2/3rds support to carry (see section 11.15). The error on Tuesday night occurred when Mayor Fontana declared that the motion to put the question had carried with eight councillors voting in favour (53%). The motion to put the question actually required the support of at least 10 councillors.

A motion to put the question has a lot of qualifications in the council procedure bylaw (see 11.14), including one that prohibits such motions when the matter involves approval of an expenditure by council of $1,000,000 or more.

To his credit, Fontana raised the issue of the improper decision later in the meeting and asked council if they wished to reconsider the main motion. Councillor Joni Baechler moved a motion to reconsider, but Fontana noted that a motion to reconsider the taxy levy target must be made by a member of council who voted in the majority. Further, a motion to reconsider also requires 2/3rds support. No one who voted in the majority (for no debate and in favour of zero) was willing to make such a motion, including, apparently, the mayor himself.

Now this may seem like so much procedural bafflegab, but it actually matters.

The vote on the taxy levy target is an important one. It sets a goal and establishes a framework within which all of the subsequent budget consultations and debates will occur. As this table of potential expenditure reductions under three different taxy levy scenarios shows, it means about $25 million in cuts, as opposed to $8 million or so if the taxy levy were to increase by 3.8%. Both proponents and opponents of the idea of a zero per cent tax increase agree that the issue is important.

Despite the importance of this vote, eight councillors voted in favour of pre-empting debate by putting the question. There were no arguments made in favour or in opposition to the tax levy target of zero per cent. Having employed this procedural tactic effectively (though improperly, as we later learned), the same group of councillors then proceeded to vote in favour of the tax levy target of zero per cent.

No debate on what was arguably the single most important item on city council's agenda that evening. Why?

It would seem that the coalition of councillors who are voting in favour of a zero per cent tax increase target are not interested in trying to convince their fellow councillors to support their position. Nor are they concerned that any member of their coalition is wavering in his or her support of the zero per cent tax increase. So they see no need to debate the issue. The outcome of the vote on this issue, it seems, is a foregone conclusion.

Of course, council has previously debated the issue of a 0% tax increase, in committee and as a council, with both debates ending in a 7-7 tie vote (tied votes fail), which brought the issue forward to Tuesday's meeting. But this specific vote on the tax levy target for the 2013 budget would finally decide the matter, and the implications for the 2013 budget are different from those in 2012 or 2011.

Most importantly, the purpose of debate on such issues at city council is not only to persuade councillors, but to justify the policy to Londoners, to articulate the rationale and to outline the expected costs and benefits. It would seem that the coalition of eight councillors can no longer be bothered to do so.

They will likely come to regret that decision.

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Posted in Politics, Public policy, municipal, tax

Opting-out of CETA: what does it mean for London?

May 2nd, 2012

Observing the debate last night on London "opting-out" of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, I had to wonder if some of the councillors understand international trade negotiations and how trade agreements are implemented.

After debating the issue, city council voted 10-5 to opt-out of CETA. This notion of municipalities "opting-out" of CETA is being advanced by the Council of Canadians, which celebrated its success after the council vote.

During the debate, Paul Van Meerbergen, Joe Fontana and Harold Usher were the strongest voices against the motion to opt-out. Stephen Orser also spoke against the motion. Both Van Meerbergen and Orser said that this motion would send a signal to businesses that London isn't open to trade. Usher argued that the Federation of Canadian Municipalities, of which he is a director, needs the city's support to advocate for the agreement to respect its seven principles.

Several councillors clearly do not trust the federal government to negotiate a trade deal that would benefit London. They were quite concerned about the impact of a potential future agreement on municipal procurement policy. Sub-national (ie provincial and municipal procurement) is a relatively new topic in international trade agreements for Canada. Although Canada is a signatory to the WTO's plurilateral (which means not all of the members of the WTO are signatories) Agreement on Government Procurement (GPA), that agreement only applies to procurement by the federal government, not provinces or municipalities. The more recent Canada-US Procurement Agreement, which allowed Canadian firms to be exempted from US Buy American provisions, included:

  • provincial and territorial procurement commitments under the WTO Agreement on Government Procurement (GPA) for all provinces and territories (except Nunavut) in exchange for U.S. sub-federal GPA commitments;
  • temporary Canadian procurement commitments for construction projects for some provincial/territorial agencies not included in the GPA and a significant number of municipalities in exchange for the U.S. exempting Canada from the Buy American provisions of the Recovery Act for 7 programs of interest that receive funding from Recovery Act; and
  • a commitment to explore the scope for a long term government procurement agreement between Canada and the U.S., within the next 12 months, to deepen on a reciprocal basis, procurement commitments beyond those in the WTO GPA and NAFTA.

London was included in the list of municipalities in Ontario that these temporary procurement commitments applied to (see Part B - Market Access).

The Canada-US Procurement Agreement also includes these general exceptions:

3. Subject to the requirement that such measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination where the same conditions prevail or disguised restriction on international trade, nothing in this Appendix will be construed to prevent Provinces and Territories from imposing or enforcing measures inter alia:

  • necessary to protect public morals, order or safety;
  • necessary to protect human, animal or plant life or health;
  • necessary to protect intellectual property; or
  • relating to construction services of persons with disabilities, philanthropic institutions or prison labour.

It is also worth mentioning that the negotiated rules are reciprocal: if we agree to no longer discriminate against European companies in municipal procurement, then European municipalities will not discriminate against Canadian companies in their procurement decisions. The idea is to increase competition and thereby lower costs for government procurement. Increased market access to Europe could be very good for a London success story like construction company Ellis Don.

Now, regardless of whether you think an agreement between Canada and the European Union would be good or bad for Canada, Ontario or London, it is worth considering how international trade agreements actually function.

First, two or more national governments enter into negotiations with each other. Once they reach agreement, each national government is responsible for enacting or updating legislation to implement what was agreed. In federal states like Canada, to the extent that the agreement affects sub-national governments within the federation (provinces in Canada's case) or the municipalities within those provinces, the national government will need to negotiate with the provinces to implement the agreement. This is why provinces are involved in negotiating CETA.

Whether a municipality is "in" or "out" during negotiations means little. It is totally impractical to have individual municipalities involved in international trade negotiations -- just think how many cities at least the size of London there are in the European Union! (answer: there are roughly 100 such cities in Europe).

Regardless of what city council decided last night, the federal government and the provinces will continue negotiating a deal with their counterparts in the European Union. If they reach agreement and the federal government and provincial governments enact legislation and regulations to implement CETA, then London -- or any municipality in Canada, for that matter -- will not be able to opt-out of those federal or provincial laws and regulations.

At best, this "opting-out" decision is a negotiating tactic between the city and the Province of Ontario. At worst, it is just an roundabout attempt by the Council of Canadians to scupper the trade negotiations before an agreement is reached.

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Posted in Politics, Public policy, municipal, trade

Globalization and free trade

March 5th, 2012

Glen Pearson, my former MP and a community leader here in London, recently blogged about globalization, free trade and the negative impact he believes both have had on Canada over the past few decades.

While I share some of Glen's concerns, I take issue with a few of his arguments:

  1. "Globalization and free trade were designed to give the stronger economic countries like Canada a global advantage."
    Wrong. The purpose of trade liberalization, especially multilateral trade agreements through the World Trade Organization, is to optimize the use of resources throughout the whole world. Since the WTO was established in 1995, the world's population has increased by 1.16 billion people (+20% from 5.68 billion to 6.84 billion). If we do not produce good and services as efficiently as possible, how can we accomodate this kind of population growth? There are lots of benefits to a negotiated, rules-based trading regime. Cheaper imports and a lower cost of living, in all countries, not just Canada, are two of these benefits.
  2. "government and economic leaders didn’t fully foresee that successful companies in the West would actually abandon their historic partnerships and move to those parts of the world offering cheap labour"

    On the contrary, governments and economic leaders did believe that firms would move jobs to lower cost jurisdictions. Moreover, Mike Moffatt has written at length about what's happened to manufacturing jobs in Canada. The main driver behind job losses in Canadian manufacturing is better technology. Check out this chart on GDP per unit of energy, a measure of how efficiently we are producing goods and services.We are producing much more for each unit of energy, which is a relatively good thing. As Mike observes, this is no comfort to folks who have lost their jobs in manufacturing here in Canada. But it's the truth.

  3. "While the middle-class in Brazil, India or China increase significantly, in North America we are headed in the opposite direction. Our standard of living has remained stagnant, with no sign of increase."

    This is the part of the argument that bothers me the most and is the most surprising to me. First of all, our standard of living in Canada, as measured by Gross National Income per capita, has increased by 24% since 1995 to $24,737 in 2010. Compare that to GNI per capita of $4,530 (Brazil), $2,355 (China) and $811 (India).

    4. Glen has dedicated a lot of his time to South Sudan and he knows firsthand the abject poverty people experience all over the world simply through the accident of where they were born. From a humanitarian perspective, I would like to see the GNI per capita continue to increase in Brazil, China and India. I certainly like the trends in the chart showing the percentage of people living on $2 a day or less in Brazil, China, India and Canada. You will notice that Canada doesn't even show up on the graph. If the cost of lifting literally hundreds of millions of people out of abject poverty is some pressure on the Canadian middle class, I'm fine with that.

Despite these objections to his general argument, there are two areas where Glen and I likely agree.

First, our failure to price the full cost of oil encourages the distant production and international shipment of goods. A global carbon tax regime would better account for the real costs of oil consumption. It would also be very likely to reduce the extent of globalization within the trade regime that we have already negotiated.

Second, very wealthy countries with high and rising GNI per capita, like Canada, could do a better job of redistributing income. I believe a basic income supplement that brings all Canadians above the low income cut-off (LICO), with a tax back rate that minimizes disincentives to work, would be a good policy to adopt here in Canada. If it requires a modest increase in consumption or income taxes, I'm fine with that.

We are suffering through a very tumultuous economy in the past few years and it has hit some people much harder than others. And there are no shortage of real problems here in Canada and the wider world to address. But I believe our institutions of governance, at the local, provincial, national and international levels, continue to serve us well, and I remain optimistic about the future.

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Posted in Public policy, trade

Debunking the taxman myth

June 28th, 2011

The PC Party of Ontario is running a campaign to label Dalton McGuinty as the "taxman." But is it true?

Let's compare the Ontario PCs under Mike Harris and Ernie Eves (1995-2002) and Dalton McGuinty (2003-2010), two eight-year periods (the transition of government occurred part-way through 2002-2003). Please see the notes at the bottom of the post for important caveats about the Education Property Tax and Government Business Enterprises.

Bottom line: No, it's not true. Harris/Eves and McGuinty have taxed Ontarians to roughly the same extent. Tax revenue as a percentage of GDP was 10.57% under Harris/Eves and 10.47% under McGuinty.

Tax revenue generally increases along with GDP, and we can see in Chart 1 that GDP and tax revenue have increased under both the PCPO and the OLP. For this reason, a good measure of the tax burden is tax revenue as a percentage of GDP. As Chart 2 shows, this metric has been very steady over the 16 years in question, through both PCPO and OLP majority governments. If McGuinty is a "taxman," then Mike Harris and Ernie Eves deserve that moniker, too.


So why does this myth of Dalton as a "taxman" exist?

It is an invented marketing message, created by the PCPO, designed to convince voters to turf McGuinty. Although it's inaccurate, there are elements that resonate with voters. Ironically, one true element of the myth is based on a decision by McGuinty that you would expect the PCPO to be in favour of: increased transparency in taxation.

When McGuinty introduced the health premium, he could have chosen to increase personal income tax rates instead. If he had, there would be no "health premium" for PCPO to complain about incessantly. Establishing a new tax specifically for health at least associates the revenue with a particular area of expenditure. It is worth noting that the PCPO isn't proposing to cut or eliminate the health premium.

Similarly, the PCPO rails against eco fees, which aren't a tax collected by government but a means for business to organize and fund its own recycling through a non-profit. They also complain constantly about the HST, which is more efficient, better for manufacturers and reduces the paperwork burden on businesses. They don't propose to get rid of the HST.

The PCPO calls Dalton the "taxman," but tax revenue has increased under his government as it did under the PCPO governments of Harris and Eves. They apparently hate the health premium and the HST, but they don't propose to get rid of either tax. Perhaps they should look in the mirror while they are calling McGuinty names.

Or, better yet, propose a credible and better alternative to the tax policy of the current government.

Data

Check out the data for this post in a Google spreadsheet, compiled from the public accounts of Ontario.

Summary metrics

Metric Harris/Eves (1995-2002) McGuinty (2003-2010)
Growth in GDP 45.08% 26.45%
Average annual increase in GDP 5.48% 3.42%
Overall growth in tax revenue 39.37% 19.68%
Average Tax as % of GDP 10.57% 10.47%

Distribution of tax revenue (2010, %)

  • Personal Income Tax (39.4%)
  • Sales Tax (28.8%)
  • Education Property Tax1 (not included)
  • Corporations Tax (9.5%)
  • Employer Health Tax (7.7%)
  • Ontario Health Premium (4.7%)
  • Gasoline Tax (3.9%)
  • Tobacco Tax (1.8%)
  • Land Transfer Tax (1.7%)
  • Fuel Tax (1.1%)
  • Electricity Payments-In-Lieu of Taxes (0.9%)
  • Other Taxes (0.5%)

Note 1: Previous to 2008, the Education Property Tax was netted against school board expenditures and not included in the government revenues in the public accounts. In 2008, the government moved to a simpler means of accounting for this revenue and now reports the tax revenue separately from the expenditures. For purposes of comparison, as the prior public accounts have not been restated, I've excluded it from these figures. The impact should be negligible.

Note 2: The government also receives income from Government Business Enterprises like Hydro One, Ontario Lottery and Gaming Corporation, Ontario Power Generation and the LCBO. In 2010, net income from these GBEs was $4.2 billion.

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Posted in Politics, Public policy, fiscal, tax

Reforming the Liberal Party

May 5th, 2011

A few days after we lost to Ed Holder in London West, here are some reflections on the election and the Liberal Party of Canada.

The election

  1. This was an historic ass-kicking: 18.9% of the popular vote nationally is dreadful (14.2% in Quebec!).
  2. This was a rejection of Michael Ignatieff, in particular: whether he deserved it or not, most Canadians did not like him or want him to be Prime Minister. The leadership index from Nanos Research shows him lower at the end of the campaign than before.
  3. With a few exceptions, I liked our 2011 election platform. I thought it was well-suited to the moment and the leader.
  4. Turnout continues to be awful at 61.7%. I believe low turnout is related to the nature of the issues being discussed and the lack of articulated disagreement between the CPC, LPC and NDP. No one advocated raising the GST to deal with the deficit. No one proposed anything radical or interesting on health care. No one proposed anything significant on national defence. A common security perimeter with the United States was barely discussed. No one proposed anything especially significant to address poverty.
  5. The lack of significant differentiation on policy made the personalities of the leaders even more important than they usually are.
  6. The CPC wilfully misrepresented Liberal policy (iPod tax, hiking taxes in general) and ran a concerted negative campaign against Michael Ignatieff, which succeeded. They will do so again and again with every successive Liberal leader until they lose. I find it disgusting and shameful, but there is no denying that it worked.

The next four years

  1. The CPC continues to lower federal revenue by cutting taxes, in line with their long-term plan to shrink the fiscal capacity of the federal government and relatively strengthen the fiscal capacity of the provincial governments. The GST cut and the cuts to corporate taxes both provide more revenue to the provincial governments (potential, in the case of the GST: only NS and QC took the tax points).
  2. As a result of 1), I doubt we will be back to a balanced federal budget by 2015.
  3. I expect the CPC will continue to govern as they have -- that is, like a mean-spirited Liberal government -- and will continue to cut specific programs and funding for specific organizations that they dislike (long-gun registry, Status of Women, Kairos, Court Challenges, etc). They will not introduce government legislation on major social issues like same-sex marriage and abortion (this is because they are chicken-shit cowards; see also point 5, below). They will introduce some legislation in the form of private members' bills on these issues.
  4. We may see some action on Senate reform with the CPC and NDP holding 87.3% of the seats in the House of Commons, although I think it is unlikely, given the constitutional issues involved.
  5. Stephen Harper will appoint two Justices to the Supreme Court of Canada who are staunch Conservatives. Conservatives know that influence on the Supreme Court of Canada is essential to achieving their long-term social policy goals.
  6. Stephen Harper will have a hard time maintaining his iron grip on his MPs, now that there are more of them and they have a majority government.
  7. The CPC will gleefully oversee the shrinkage of the federal public service by attrition, as veteran public servants retire and are not replaced by new hires.
  8. The CPC will do absolutely nothing about the environment.
  9. The CPC will continue to spend more on the military, as part of its 20-year Canada First defence strategy.
  10. The CPC will introduce and pass a number of crime bills that will result in more people being incarcerated for longer periods of time.
  11. The CPC will cut the per vote subsidy to federal parties, which will negatively impact the NDP, LPC and Bloc.

Reforming the Liberal Party of Canada

  1. I am personally committed to reforming the Liberal Party of Canada. I invite you to join me by becoming a member and a monthly donor through the Victory Fund. Don't sit on the sidelines and complain -- get involved and try your best to improve the party from within.
  2. We should not merge with the NDP, but we should have a discussion about doing so.
  3. The most important quality of our next leader must be integrity. We need someone who a skeptical and cynical electorate can believe in.
  4. Related to 2), our next platform should be focused on a limited number of commitments that we can accomplish in short order. We need to restore faith in politicians and the best way of doing so is to repeatedly do what we say we will do.
  5. Forget "centrist," we need to be the party that is fiscally conservative and socially liberal. This doesn't mean that we need to be the party of the continual tax cut (that isn't necessarily fiscally conservative) but it does mean that we need to have the courage to honestly confront issues like the sustainability of funding for health care. We shouldn't live in a fiscal fantasy land. On the socially liberal front, although we have achieved much already, we can do more. There are many laws and regulations on the books that are no longer relevant or necessary. We should be the party of smart government that respects individual freedom. Right now, I would say that party is the Green Party.
  6. We should be the party of an open Internet, increased competition and less restrictive intellectual property law.
  7. The policy conference we had at Canada @ 150 was good, but avoided the question of national defence. Within the Liberal Party we need to debate the role of the Canadian military in the next 25 years or so. In general, we need to make international policy a priority. Let's not pretend the federal government is just a big provincial government.
  8. We need to develop a serious plan for democratic reform. Electoral reform, limits on the power of the Prime Minister, reform of Question Period, mandatory voting, a three-line whip system -- there are lots of ideas that we should discuss and could be part of an effective democratic reform package. I like the Westminster system, but even within that tradition we can improve things substantially.

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Posted in Politics, Public policy, copyright, defence, fiscal, tax

Liberals and corporate income tax

February 15th, 2011

Summary

  1. The LPC is advocating a corporate income tax (CIT) rate increase to fund new ongoing programs like family care.
  2. Even without new programs, given the current state of federal revenues, CIT reductions are ill-advised now and in the medium term.
  3. The LPC is targeting the CIT rate because it is the easiest tax, politically, to increase. Not because of how efficient it is as a tax.
  4. The LPC is talking about reducing the CIT rate "when it is affordable" to keep its options open and to differentiate itself from the NDP, which sees no scenario in the medium term wherein a CIT reduction is reasonable.
  5. It will take quite a while for the federal accounts to return to surplus, with the CIT increase or without. There is no reason to fear a see-saw countercyclical pattern of increasing and decreasing the CIT rate at exactly the wrong moment.

My friend and economist Mike Moffatt argues at Worthwhile Canadian Initiative against the LPC's proposed reversal and deferral of legislated CIT reductions. It's the deferral that rankles him. First, some basic facts:

  • From 2000 to 2010, the federal corporate income tax rate was reduced from 27% to 18% (-35.6%). As of Jan 2011, it is 16.5% and in 2012 it will fall to 15%.
  • The government reduced the GST from 7% to 6% in 2006 and from 6% to 5% in 2008. The total revenue foregone from the reduction is approx $10.8 billion per year (see Reference Sheet for Revenue Impacts Arising from Tax Adjustments [PDF]).
  • The government also reduced the lowest marginal rate from 16% to 15% (revenue impact of approx $5.5 billion).
  • The cost to the federal government of the reversal of planned reductions in CIT has been pegged at $6 billion, but Stephen Gordon suggests that offsetting effects on wages could make it more like $2-$3 billion.
  • The federal government's revenue is basically distributed as follows: 47% personal income tax; 13.9% corporate income tax; 2.4% non-resident income tax; 18.6% other taxes & duties; 7.7% EI premiums; 9.9% other revenues.

The LPC has proposed some new programs — eg. family care — and the LPC wants to fund these initiatives without increasing the deficit/slowing the return to a balanced budget. The LPC wants to maintain and build on its reputation as a "good fiscal manager," a reputation that was established based on the budgetary surpluses of the Chretien/Martin years.

Now, I believe that restoring the GST from 5% to 7% (join the Facebook group!), thereby raising $10.8 billion or so in revenue, is smarter than raising the CIT from 15% to 18% ($3-$6 billion in revenue). But a GST increase is a loser politically, especially at a time when voters are very concerned with their own financial security. This shouldn't matter much to bureaucrats or economists with a long-term view, but it certainly matters to politicians. Political parties must choose policy options within certain constraints. Chief among these constraints is support of a given policy by citizens at a particular moment in time. Of the various sources of revenue available to the federal government, CIT is the easiest one, politically, to increase. Of course this is obvious to economists who spend a lot of time looking at incentives and behaviour.

The LPC is proposing an increase from the current rate of 16.5% to 18% rather than a reduction to 15% by 2012, as legislated (net difference 3%). Ignatieff often vaguely refers to reducing the CIT rate "when we can afford to." His most recent comment was "This party understands the benefit of competitive corporate tax. We’re not the NDP here. You can cut corporate tax in a surplus, but it’s irresponsible to cut it when you have a $56-billion deficit." Presumably the earliest that the CIT cuts would be "affordable" is after the federal deficit is eliminated. Scott Brison has said similar things about reducing CIT once the federal accounts are back in surplus.

Now Mike, being a rather smart fellow, points out that cutting CIT during fiscal surpluses (presumably growth years for the economy as a whole) and increasing during deficits (presumably low growth/contractions) is counterproductive in terms of stimulating the economy. This is a bit of a red herring, as Mike knows very well: the CIT rate shouldn't be used in the short-term to stimulate the economy and nor should it be alternately increased/decreased. The CIT should 1) raise revenue for government and 2) provide a relatively stable and attractive environment that encourages businesses to allocate capital to Canada. I doubt the proposed CIT increases would have much effect on the economy in the short-term anyway.

The LPC policy of deferring CIT cuts bothers Mike. As he points out, if the CIT rate is reduced during years of surplus, when the business cycle turns again, the federal accounts may be thrown back into deficit. For a CIT cut to be affordable, then, it should be able, at least, to withstand a full business cycle. It's a good point, one that a prudent LPC government should take into consideration when the federal accounts are in surplus. Surely no one is suggesting, or implying, that some future LPC government will immediately cut the CIT as soon as the federal budget shows a modest surplus? I would expect them to at least restore the contingency reserve first.

The CPC cut the GST by 28.5% (2006 & 2008) and the CIT by 11.8% (2008) while in surplus. They proceeded to cut the CIT by 15.3% (2008-2011) while in deficit. They also introduced tax free savings accounts and reduced the lowest marginal rate from 16% to 15% (revenue impact of approx $5.5 billion). As a result of these cuts, the federal accounts are not returning to surplus any time soon. With tax revenues reduced, contingency budgeting eliminated, and both interest payments on the debt and program spending increasing annually, the PBO is projecting deficits of $43.1, $27.9, $23.2 and $19 billion for years 2010-2011 to 2013-2014, inclusive (see Estimating Potential GDP and Government's Structural Budget Balance). Importantly, in 2013-2014, 99.5% of the projected $19 billion deficit is attributable to structural, rather than cyclical, factors. A major driver of this structural deficit is lower federal revenues.

I haven't seen projections beyond 2014, but the picture doesn't get any prettier: our aging population will likely drive down major revenue sources like PIT while driving up major federal spending such as transfers to the provinces for health care.

Given the status quo, it will be quite some time before the federal accounts are back in surplus (seven years?). With the reversal of the CIT from 15% to 18%, we will reach this point a bit sooner (five years?). But even under the latter scenario, the LPC would not be reducing the CIT rate for at least five years, and probably more. We have little to fear from a strawman LPC government that would raise the CIT rate only to reduce it, then raise it, then reduce it, ad nauseum.

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Posted in Politics, Public policy, fiscal, tax

Why free tuition is a bad idea

November 23rd, 2010

At last Saturday's Southwestern Ontario regional meeting of the Liberal Party of Canada, there was a resolution for national free tuition, funded by the federal government. This idea has been raised before and I'm often speaking against it. I can understand the motivation, which is usually expressed with variants of the following:

  • "We are moving to a [knowledge/brain]-based economy."
  • "Tuition has been increasing for years! Tuition was XX when I was a student. Young people can't afford to go!"

In general, the argument relies on several myths about post-secondary education in Canada. Here are some facts, taken from a Higher Education Strategy Associates report, "Beyond the Sticker Shock," written by Alex Usher and Patrick Duncan.

  • In real dollars, nationally, total undergraduate tuition & fees has risen 25% from 1997 to 2008.
  • After factoring in the significant tax credits offered by the government, Everybody's Net Tuition (ENT) has risen only 19% from 1997 to 2008. In four provinces: Alberta (-1%), Quebec (-1%), Manitoba (-31%) & Newfoundland & Labrador (-35%), ENT has actually decreased.
  • After factoring income tax rebate programs in several provinces - Manitoba, New Brunswick, Nova Scotia and Saskatchewan - ENT has risen 11% nationally. It has decreased dramatically in several provinces - Manitoba (-102%), New Brunswick (-71%), NL (-35%) and SK (-35%) - to the point where ENT is negative in Manitoba. This means that Manitoba students earn money by going to university -- tuition is better than free.

This analysis, of course, ignores all provincial government loans & grants programs, bursary programs at post-secondary institutions, automatic academic and other scholarships, and the shift to making scholarship income (at first limited to $3,000/year but now unlimited) non-taxable.

Several other points, outlined by Alex Usher, also undermine the free tuition policy argument. Two are particularly important:

  • Participation in post-secondary education is uncorrelated with tuition rates. High-tuition Nova Scotia has higher participation rates than low-tuition Quebec.
  • Over several decades, despite many changes in tuition policy, youth from rich families are quite consistently twice as likely to attend university as youth from poor families are.

The total direct costs to the federal government of such a proposal would be approximately $4.91 billion (excluding ancillary fees), with $3.84 billion for university tuition and $1.07 billion for college tuition. Both of these amounts would be offset by roughly 34% due to savings realized by federal and provincial governments from cancelling existing tuition tax credits and rebate programs. After the effect of these offsetting cuts, the costs would be $2.53 billion and $700 million. Since the participation rate of college students is roughly even by income quartile, for a moment, let's just consider university students, where this is not the case.

Students from the highest income quartile account for approximately 37% of all university students. In contrast, students from the lowest income quartile account for just 16%. Therefore the benefits of free tuition accrue largely to students from the highest income quartile: $936 million would be "saved" by 375,000 students from the highest income quartile; $405 million would be "saved" by 162,000 students from the lowest income quartile. The primary beneficiaries of a free tuition policy are the kids of doctors, lawyers and other high-income Canadians in Ontario, BC, Nova Scotia and Alberta, where ENT is highest. While it is true that families in the highest income quartile also contribute more in taxes, a free tuition policy is certainly not progressive, as Stephen Gordon observes.

Most proposals for free tuition contemplate a prohibition on tuition, with compensation provided by the federal government to post-secondary institutions. Ignoring, for the moment, the extremely difficult federal-provincial realities of such a scheme, this approach would virtually eliminate students as revenue contributors (currently tuition fee revenue is roughly 24% of university operating budgets) and make post-secondary institutions even more reliant on government funding (back to the 1980, when governments provided 90% of operating funding). This could be very bad for post-secondary education in certain business cycles. For example, in Ontario, operating funds from the government are granted according to an institution's corridor midpoint, which is often below the number of Basic Income Units actually registered at the institution (BIUs, in turn, vary according to program and level of study). This funding formula strains institutions during periods of government spending restraint and enrolment growth at institutions. I doubt a single university or college president in Ontario would be in favour of increased government influence over universities and colleges.

A shift to more government-to-institution funding would also have the perverse effect of removing incentives for university and college-educated Canadians to remain in the province and country that paid for their education. One advantage of deferred tax expenditures such as tuition tax credits (and loan programs) is that they are received (paid back) over time by graduates who are typically working in the province or country that provides the programs. A free tuition model would provide no deferred financial incentives to keep graduates in Canada, let alone in the province where they were educated.

In summary:

  • The net cost of a national free tuition proposal (after accounting for cancelled tax credit and rebate programs) is probably $3.23 billion (increasing annually). The cost to the federal government would be slightly higher, as some of the savings from cancelled programs would accrue to provincial governments and they would not be paying for the free tuition policy.
  • Making tuition free would dramatically increase the federal government's spending on post-secondary education and would primarily benefit students from high-income families in Ontario, BC, Nova Scotia and Alberta, which have relatively high ENT. It is not, in and of itself, progressive policy. As far as federal-provincial relations go, it's a non-starter.
  • Making tuition free would further homogenize an already too undifferentiated system of post-secondary institutions and greatly increase the influence of the federal and provincial governments on post-secondary institutions at the expense of the influence of students. It would remove tuition as a useful indicator to students and parents of quality, post-graduate job prospects and the cost of undergraduate education. It would remove any personal financial stake that students have in their post-secondary education. On the plus side, it would leave the CFS with nothing to complain about.
  • All of this, if possible, would have little effect on participation rates. It would be better to spend new money on targeted programs that actually increase access to PSE.

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Posted in Public policy, post-secondary education

Liberals on Afghanistan

November 18th, 2010

Michael Ignatieff is taking a lot of heat from citizens, party members (and probably some members of the Liberal caucus) over his response to the idea, floated by PMO director of communications Dmitri Soudas, of a training mission in Afghanistan after Canada's combat role ends in 2011.

A review of some widely available facts may be helpful:

  • In June 2010, the Liberal Party announced a Global Networks Strategy. One part of that strategy reads: "[A future Liberal government will] pursue a post-combat role in Afghanistan that is focused on the training of police and military personnel in a staff college setting in Kabul, and civilian governance capacity-building"
  • In July 2010, Bob Rae released a statement upon the close of a fairly major conference in Kabul, in which he says: "In contrast to Conservative inaction, the Liberal Party has made it clear that we support a continuing non-combat commitment by Canada as part of the broad UN effort to sustain a stable, effective government in Afghanistan.  This commitment can include a role in training the Afghan army and police, as well as support for other institutions of government, including health care, education and the justice system."
  • In August, in the Toronto Star, Bob Rae wrote about Afghanistan. He noted that "Canada needs to debate and discuss the answers to these questions. The Liberal party helped draft the 2008 parliamentary resolution that permitted our troops to stay in Kandahar in a combat role, with an ever increasing role for the Afghan police and army and a stronger civilian and development presence. President Barack Obama’s review led to similar conclusions: There would be no simple, military victory; all efforts should focus on training the Afghan army and police and building the infrastructure of the country. Pakistan needed to become a reliable and steady ally in the change."

Now, I do find it interesting that Bob Rae is the lead on this issue, rather than, say, Dominic LeBlanc, who is the national defence critic. However, LeBlanc was appointed to that post in September 2010, after the Global Networks Strategy was announced. Presumably, he is on the same page as Rae and Ignatieff.

Michael Ignatieff's response to the training mission floated by the Conservatives was:

  • "This is a conversation that has to be had with Canadians. How many trainers? For how long? Who else is training? What are your training targets? What kind of mission is this? We have 10 years there, if there is a mission after 2011 the government owes Canadian an explanation."
  • "This government is (less than) two weeks away from Lisbon, the NATO meeting, (and) they are scrambling because they are under pressure from their allies," he told reporters, adding the first his party heard of it was Friday..."This is amateur hour."

The Liberal Party has been advocating this idea for months. It is known party policy. Ignatieff's response points out 1) the rushed, ill-considered way the Conservatives are raising the idea; and 2) that he believes it is incumbent on the government to provide more details before he knows if this is a good or bad idea.

As an aside, Jack Layton, in a major speech on Afghanistan in 2007, said: "Violent and petty crimes are also on the rise.  A trained police force would help Afghans immensely, but the police training effort has been slow and inadequate.  As of this month Canada has sent a grand total of 10 RCMP officers to Afghanistan.  They have trained approximately 1500 police officers. Yet in Iraq, where Canada is not participating in the war, we have trained 34,700 police officers." Of course, Layton has been consistently opposed to the combat mission, but he seems here to be more disposed to a training mission (at least for police).

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Posted in Politics, Public policy, defence

Improving the productivity of charities

March 29th, 2010

I followed the Canada @ 150 discussions online over the past three days. It was an excellent demonstration of how a political party can convene a group of interesting speakers and engage, at relatively low cost, thousands of interested citizens in a serious discussion. Less time and energy wasted travelling, too. Kudos to the technical team for making it happen and to the party leadership for believing it could work.

It was good for the party to hear some uncomfortable truths, in particular that the party is in danger of losing its soul.

At the satellite event in London on Saturday, organized by Doug Ferguson and Glen Pearson, I argued that policy should be our priority. I know that some voters aren't interested in the details of policy, but I reject the idea that people don't care or are too stupid to understand policy. Political parties, and especially party decision-makers, hide behind these two excuses when they fail to persuade voters or their execution is poor. These same folks think it is a good idea to withhold the details of a policy platform until the writ is dropped, expecting Canadians to hear about, consider and support a wide range of policy proposals in just a few weeks. We need to break this cycle.

We have to look no further than the dramatic rise of the Green Party of Canada to see the attraction a focus on policy first has for ordinary Canadians.

Recently, I was nominated for an Action Canada fellowship. Unfortunately, I just heard that I wasn't selected for an interview. But the application process prompted me to focus on the fellowship theme -- Economic Transformations -- and put forward a few policy proposals.

Canada @ 150 was a very good event in many ways, but it is just one important part of our policy development process. We need to build on this success and flesh out a serious, practical policy platform.

I believe in the importance of productivity (of both labour and capital) to our prosperity. The folks at the Institute for Competitiveness & Prosperity have produced a series of good reports on the topic. I believe education and competition are essential to productivity.

Existing policy instruments designed to increase productivity -- an accelerated capital cost allowance (CCA) for investments in machinery and equipment, for example -- operate through the income tax system and are targeted at for-profit companies. This is reasonable, as for-profit companies account for the majority of Canada's GDP. But public sector organizations, non-profits and charities aren't influenced by these policy instruments, as they don't pay income taxes.

My first idea is to provide an enhanced donation tax credit to donors who designate gifts to productivity-enhancing expenditures, such as skills upgrading and training of employees, purchases of computers, software and other technology/equipment. Specifically, I proposed a 200 per cent donation tax credit multiplier for gifts to registered charities that are designated to productivity-enhancing investments. I now believe it needs to be even higher -- say 250 per cent. For example, the tax credit for a $10,000 donation to a charity that was designated to an eligible expenditure would be 2.5 x 29% (highest existing federal tax credit) = 72.5% or $7,250. The net cost to the donor would therefore be $2,750. Such a policy instrument could allow the approximately 80,000 charities in Canada to benefit from increased productivity gains. By aligning with existing tax measures regarding eligible expenditures, the marginal cost of monitoring and enforcement would be minimized.

On the education front, I put forward two ideas for PSE:

  • We need more competition in PSE. By increasing by proportion of institutional funding that comes from students (ie tuition) while increasing grants available to low-income students, more of the funds directed to PSE would follow the student without impairing access. PSE institutions would necessarily have to further differentiate themselves from each other and compete on the basis of quality.
  • Remove disincentives in provincial funding formulas for universities that discourage year-round education, especially co-op education. The summer break is a throwback to an economy based on agriculture, and I doubt we would design a PSE system on that basis if we were starting with a blank slate. The status quo funding model for universities encourages inefficient use of capital (more and larger buildings to handle Fall/Winter enrolment peaks) and less labour (fewer professors and instructors) because operating funding is allocated on the basis of full-time equivalent enrolment without regard for how enrolment is distributed throughout the year or how capital stock is utilized. University of Waterloo is a good example of a university that has succeeded despite these disincentives.

We also need to increase competition, especially by reducing barriers to competition such as unduly long or restrictive protection of intellectual property. The Competition Policy Review Panel rightly identified this as an important issue, but seems to give priority to protecting rightsholders rather than users of intellectual property. Rightsholders have a strong financial incentive to erect barriers to competition for as long as possible. Canada should balance the private interests of rightsholders and the need for reasonable protection of intellectual property with the longer-term public benefits of strong competition, individual freedom and rapid adoption of new technology and ideas. We need to get this right in order to attract and retain highly skilled, creative workers.

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Posted in Public policy, The Third Sector

An unproductive speech

March 4th, 2010

Today's speech from the throne is heavy on regulatory initiatives. Here is a good summary. The related budget will possibly fill in gaps re: costs of the various initiatives and the overall fiscal outlook. In the meantime, let's look at what's notable in the speech from the throne.

Fiscal situation: Don't worry, be happy! No major cuts to spending or increases in revenue. Commitment to "protecting growth in transfers that directly benefit Canadians, such as pensions, health care and education." So what is left over? The 2008-2009 public accounts provide a bit of a guide, although the 2009-2010 accounts will show where the stimulus spending has been allocated. The 2008-2009 public accounts breakdown expenditures as follows:

  • Major transfers to persons (25.8%), major transfers to other governments (19.5%), other transfer payments (12.6%) and public debt charges (13.0%).
  • This leaves operating/ministries (25.7%) and crown corporations (3.7%) as areas for potential spending freezes/reductions.
  • National defence by itself accounts for $18.6 of $69.1 billion (or 27%) of the total operating category (excluding its small portion of other transfer payments).
  • Spending in all remaining ministries, excluding transfer payments, therefore accounts for only $50.5 billion (18.7%) of total government expenditures (25.7% less 6.9% for national defence).
  • As a percentage of this $50.4 billion, deficits over the next few years are projected to be 86%, 56%, 46% and 38%. Freezing spending growth on the $50.4 billion will not make a meaningful difference.
  • The government refers to eliminating "unnecessary appointments" to various boards, agencies and Crown Corporations. This is a token gesture, but perhaps indicative of the government's future plans for Crown Corporations, which account for $8 billion in spending.

The government's view on balancing the budget:

  • Step one: wind down stimulus spending within a year.
  • Step two: restrain spending (ie. salary freezes, overall departmental spending caps, etc)
  • Step three: hope the economy rebounds and more tax revenue is available.

What is the plan for national defence?

  • The combat mission in Afghanistan is scheduled to end in 2011.
  • Since the mission in Afghanistan began, national defence spending has increased by 82% from $10.4 billion to $19 billion. Roughly half of this increase occurred under Liberal governments; the other half occurred under the Conservative government.
  • The strength of the regular force has increased by 10.3% from 61,340 to 67,756 since 2003-2004 (still well below a recent historical peak of 75,000 in 1994).
  • The Canada First defence strategy, announced in 2008, committed the government to steady increases in defence spending, on the order of 2% annually, with a goal of $30 billion by 2027-2028.
  • Will national defence spending be reduced? Although this may seem unlikely, given the government's enthusiasm for the military, the Mulroney government talked a big game about the military as well. It ultimately cut spending. It remains to be seen whether the departmental freeze will apply to DND, which is the largest employer in the federal government and one of the largest in Canada.

Copyright & IP law to be "strengthened." This is likely code for greater regulatory/legal barriers to competition in creative industries. Rightsholders seek legal protections but who stands up for users and citizens? Conservatives need to be reminded of the virtues of creative destruction and individual freedom, apparently. I'm still somewhat optimistic that Tony Clement and especially James Moore will see the light.

Taxes: nary a mention of the increasing EI premiums, airport security tax increase or HST harmonization.

Environment: The government proposes very little in such an important policy area.

Trade: Government commits to pursuing bilateral FTAs, essentially giving up on the multilateral process through the WTO. This is bad news for Canada. Is it a surprise that there have been four ministers of international trade since Feb 2006?

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Posted in Public policy, copyright, defence, fiscal, tax, trade