Alex Himelfarb and Jordan Himelfarb., eds.,
Tax is Not a Four-Letter Word: A Different Take on Taxes in Canada.
Waterloo, ON: Wilfrid Laurier University Press, 2013.
304 pages.

David Stockman, sometime Director of the U.S. Office and Management and Budget under Ronald Reagan, is often credited with articulating the conservative strategy for restraining Leviathan: “Starve the beast.” In other words, cut taxes to create a deficit, thereby forcing program cuts to eliminate the deficits produced by the cuts.

Whatever the origins of the strategy, it is one that, according to the Himelfarbs and numerous contributors to this recent volume, has been strongly embraced by the Harper government. Though there can be many reasons for cutting taxes, the Stockman strategy provides a plausible reading of a Conservative government whose leader has publicly stated that there is no such thing as a “good tax.” It also provides a foretaste of the Conservative platform for the next federal election: more tax cuts.

Across-the-board tax cuts are an effective electoral strategy since, in the short run, they produce only winners; everyone has more money in their pockets. Tax cuts are never introduced alongside a list of the eventual program cuts that will result from the lost revenue, so the “losers” are hidden from view at election time, a point well developed by Hugh Mackenzie and Jim Stanford in their respective contributions to this volume

As the Himelfarbs note, nobody actually likes paying taxes. In the past three decades, however, tax has gone from being an irritant to a four-letter word. In the past, they argue, we accepted taxes as the legitimate price for valued public goods and services, redistribution and new investments in a better future. Now, all political parties construct their platforms so as to avoid being labelled as a “tax-and-spender.” In the 2011 election, the Conservatives promised deep cuts, while the Liberals promised not to raise taxes. The NDP promised tax breaks for families and small business offset by higher corporate taxes. The question the Himelfarbs ask is: What has changed? It didn’t all begin with Harper.

The research literature on the topic typically points to two somewhat different accounts: (1) changes in macroeconomic and taxation theory, ideas eventually adopted even by formerly centre-left parties of the European variety, and (2) organized combat (i.e. politics) led by neoliberal/neoconservative interests.1 The arguments advanced here provide a mix of both, but with heavy emphasis on the latter.

The Second World War served as the stimulus for the growth of mass taxation and rising state revenues throughout the developed world. In most countries, tax revenues doubled as a share of GDP between 1930 and 1945.2 Canada was no exception. The war also centralized power in Ottawa, leaving federal authorities with a highly professionalized bureaucracy and – most importantly – dominance of the primary tax fields. When a federal-provincial conference failed to agree on a new system of revenue sharing in 1941, the federal government simply preempted the provinces, announcing dramatic increases in all tax fields, including fields the provinces had previously occupied.

At the close of the war, there was an expectation that taxes would be rolled back to prewar levels, but that did not happen. As the logic of Keynesian economic management took hold, policy elites saw taxation policy as a tool for enhancing economic efficiency as well as providing revenues for health care, education and income redistribution. All that came to an end with the apparent failure of Keynesianism in the 1970s, opening a political space for Reagan, Thatcher and what might be called “Hayek’s revenge.”

“Tax reform” was not just a right-wing conspiracy, however. A plethora of loopholes, credits and deductions in an increasingly complex tax system led to growing tax expenditures. As Sven Steinmo noted,3 tax policy experts, including many on the left, concluded that tax expenditures as actually institutionalized were often simply “giveaways to the rich and powerful.” Rather than enhancing economic efficiency, they were creating distortions in the economy favouring special interests. In his chapter, Scott Clark, a former deputy minister of finance, suggests that little has changed in this respect.

Robin Boadway discusses the fading of the revenue-raising capacity of the central government and the rise of provincial control over both revenues and spending. Why is this important? The classic finding from comparative cross-national research is that decentralized states constrain social spending, especially if both taxation and spending are highly decentralized. Constitutional structures that generate multiple “veto points” privilege interests that wish to block government intervention in health and social policy.

Canada has always had a federal constitutional structure, of course, and this fact explains in part why Canadian social spending has long been well below the OECD average. Nevertheless, the waxing of federal control over revenues in the postwar decades created the opportunity for Ottawa to construct national social policies, and its subsequent waning has eroded that capacity. Boadway concludes that there is little doubt that revenue decentralization has introduced competitive pressures that have eroded redistribution, and indeed some fans of decentralization see that as an advantage. Ottawa’s declining share of provincial expenditures on health, education and welfare erodes its authority in these fields and its capacity to meet its obligations specified in section 36(1) of the Constitution Act.

In a sharp political history of the evolution of Canadian tax policy, Matt Fodor points to the Reagan-Thatcher revolution as the starting point and then goes on to describe how “neoliberal” ideas spread and then solidified among both political and policy elites, inside and outside of government. Eugene Lang and Phillip DeMont track changes in taxation levels and put paid to the notion that Canada is a high-tax country by international standards. Trish Hennessey puts cognitive linguistics to work to deconstruct the political narratives of the antitax agenda.

Frank Graves reviews Canadian public opinion and concludes that there is support for taxing corporations, the rich, polluters and “vices.” Overall, however, the emotional appeal of lower taxes and less spending trumps less viscerally engaging arguments for progressive taxation or fixing the public plumbing, posing a critical challenge for progressives.

Four concluding chapters discuss reforms that might lead to a fairer and more efficient tax system. Marc Lee and Iglika Ivanova focus on changes that would make the tax system more progressive (e.g. higher rates for high income earners, a wealth tax, rationalizing tax expenditures, implementing a guaranteed income). Stéphane Dion makes the case for carbon taxes and Toby Sanger for a financial transaction tax. Scott Clark advances the now conventional argument among tax economists for a shift away from income to consumption taxes, but also advocates tax simplification (to deal with tax expenditures) and greater progressivity.

The authors are not all at one on the progressivity issue, however. Hugh Mackenzie criticizes the left for focusing on the distinction between “progressive” (good) taxes and “regressive” (bad) taxes and failing to look at what those taxes can buy. As he points out, regressive taxes (e.g. consumption taxes) can be used for progressive purposes (public health care, education, public transport). I increasingly tend to agree.

Most tax experts agree that overall taxation rates (i.e. from all sources) are proportional to income over the income distribution, much like a flat tax. Redistribution occurs almost entirely on the spending side, not only in the form of income transfers but also in public services. On the basis of cross-national comparisons of the effects of taxation systems on inequality, Lane Kenworthy concluded that progressivity in taxation systems matters a little bit but not very much.4 What matters most is the quantity of tax revenues rather than the progressivity of the tax mix.

If Kenworthy is right, then Canada is in trouble. According to OECD estimates, total government revenues from all tax and nontax revenues at all levels of government peaked at about 45 per cent of GDP in the late 1990s, slightly above the OECD median. By 2012 the take was about 38 per cent of GDP, a decline of almost seven percentage points, and now well below the OECD median.

There has been much chatter about new “social investments” in early childhood education and, in Toronto, in improved public transportation. But there has been little interest in paying for these investments. In an antitax political culture, tax cuts are easy. Once made, however, they are extremely difficult to restore. Pity the poor party leader who proposes to raise the GST rate back to 7 per cent again.

To my mind, the main claims of the tax-cutters have been largely discredited. Marginal tax rates have been cut without any measurable trickle-down or increases in tax revenues. Corporate tax rates have been slashed without the promised gains in productivity. Yet the antitax agenda remains in place. The question for the Himelfarbs’ next volume should be: Why so?

The chapters are mainly written by progressives for progressives and are unlikely to become required reading for Harper’s cabinet or senior public officials. For the general reader, however, the book provides a lively and accessible introduction to how we got the way we are going in the field of taxation policy. Progressives are typically full of suggestions for more and better spending on new social programs and public investments but pay less attention to the revenue side. Tax Is Not a Four-Letter Word provides a much-needed antidote.

Readers expecting lots of inside dope from a former Clerk of the Privy Council, Alex Himelfarb, will be disappointed. I was. A show-and-tell account, however, would no doubt have violated all sorts of secrecy oaths.

Continue reading “How tax became a four-letter word”

Up to the late 1990s, a certain smugness was evident in studies of Canadian income inequality. While an upward trend in inequality was evident in the United States and Britain by the 1980s, any signs of rising income inequality in Canada appeared to be offset by the welfare state. Taxes and transfers were doing their job. Canadians might not be as kind and gentle as the Swedes but we were certainly kinder and gentler than those nasty Americans or the increasingly unlovely Brits.

However, it turned out that Canada was not different from the United States and Britain, just a little behind. In the latter half of the 1990s, income inequality in Canada surged upward after four decades of relative stability. This surge in inequality is especially disturbing because it occurred during a period of economic expansion when, if anything, we should expect inequality to decline. A reasonable expectation given its cyclical nature was that by 2003 or so our Gini index of inequality would have fallen back to 1989 levels, just under 0.28. Instead, it was close to 0.32.

When inequality or poverty measures change significantly, there are always three likely suspects to account for the shift: changes in labour markets (e.g. rising earnings inequality), changes in families (e.g. more lone parents) and changes in public policies (cuts to the “welfare state”).

Given the timing of the inequality surge, it is tempting to point the finger at the welfare state. The latter half of the 1990s was the period when Unemployment Insurance (UI) became Employment Insurance (EI) and access to benefits became more restrictive. Social assistance benefits were overhauled in a number of provinces, especially Alberta, British Columbia and Ontario. And federal and provincial surtaxes on high-income earners were abandoned.

As it turns out, however, these efforts at welfare state “retrenchment” constitute a small part of the story. Two recent studies of the effect of taxes and transfers on this trend tell much the same story,1 and the answer is not as simple as one might suspect.

The redistributive impact of taxes and transfers on income inequality has actually risen, not fallen, over the past two decades. So despite the retrenchment efforts of the 1990s, the welfare state has not been withering away. However, it has not been keeping pace with the changes in labour markets and families that are driving the surge. During the 1980s, the increase in the redistributive effect of taxes and transfers more than offset the increase in inequality due to changes in labour markets and families. By contrast, between 1989 and 2004, the increase in the redistributive effect offset less than a quarter of the increase due to changes in labour markets and families.

The main conclusion from these studies is that politics and policy change matter a little but not very much. The other two suspects, changes in labour markets and especially changes in families, matter much more. However, that leaves open the question: what might have happened had the Canadian welfare state taken a more aggressive stance toward the underlying trends in labour markets and family formation? Fortunately, the experience of the province of Quebec provides some clues. As Pierre Fortin documents in this issue, policy and politics do matter.2 Quebec’s more aggressive approach to family well-being has mattered a lot.

Changes in labour markets are important but for most families/households, changes in family formation and the family life course are the big drivers of the surge in inequality. Aggressive policy change was required to keep pace with these developments. Outside Quebec, that didn’t happen.

So what did happen?

Figure 1 illustrates the main story: the surge in market family income inequality that extended from roughly 1980 to 2000. Market family income refers to all income that family members (and unattached persons) bring home from work or receive in the form of dividends, rents and the like. It does not include income transfers from government or take account of taxes paid.

The stunning fact here is that for three decades market incomes in the middle and the bottom of the income scale have been essentially stagnant while incomes at the top have been rising. Canada has been producing more wealth, but the bottom half has not been getting its share. In the early postwar decades in the United States, a rising tide was lifting all boats. While Canada does not have data for those decades, it is likely that trends were similar north of the border. So what accounts for this historic shift?

Changes in labour markets matter. Surging compensation among the top 1 per cent was a key factor.3 Declining unionization rates played an important role, as did the declining earnings of recent immigrants.4 Rising inequality in male and female earnings and rising returns to education were also important. But the main conclusion of a recent fine study by Yuqian Lu, René Morissette and Tammy Schirle is that changes in families matter more.5 This is a nontrivial result, since family formation and family behaviour are not easily amenable to policy intervention.

Divorce rates have risen and marriage rates have fallen. There are many more lone parents raising children as a result and fewer adults are benefiting from the economies of scale associated with shared living arrangements or the “insurance” provided by an employed spouse during spells of unemployment. The result is a “quantity” problem. Some households have lots of labour to sell (two or more earners) while more families have comparatively little (single-earner households with and without children).

Changes in families can have offsetting effects. Rising education and employment rates among women have had strong equalizing impacts among families. But the relative importance of these changes depends on who marries whom. Educational “homogamy” (the tendency of like to marry like) has risen substantially since the 1970s. Between 1971 and 2001, the proportion of educationally homogamous marriages among young Canadian adults (34 and under) rose from 42 per cent to 55 per cent of all marriages. This was a period when the employment and earnings gap between the more and less educated was also rising. This can be thought of as a “quality” problem: the divide between households with lots of high-quality (educated) labour to sell and those with fewer labour market skills has grown.

To illustrate, consider Figure 2. In 1980, the highest-paid wives were married to men earning between $30,000 and $40,000 per year. Women married to men earning less than $30,000 earned substantially less – and so did women married to men earning more than $40,000. By 2000, in contrast, all this had changed. Women married to men with low earnings (less than $10,000) saw their own relative earnings fall by about 35 per cent, while women married to men with high earnings saw their earnings rise by about 21 per cent. In 1980, the relationship between husbands’ and wives’ earnings looked somewhat like an inverted U: women married to men in the lower middle of the earnings distribution were earning the most. By 2000, the relationship was such that the highest-paid women were married to the highest-paid men, and the lowest-paid women to the lowest-paid men. And over the entire period, rising returns to education favoured families in the top half of the scale.

That well-educated women and men tend to marry each other and subsequently have high earnings and low rates of unemployment is unlikely to change as a result of public policy. A “Lavalife Canada” program aimed at introducing university grads to high-school dropouts is not on anyone’s policy agenda for the near future.

There has also been a steady increase in lone-parent families – from about 6 per cent of all families in 1980 to 11 per cent in 2005 – and a rising number of families without kids. Lu, Morrissette and Schirle estimate that, together, these changes accounted for about 20 per cent of the rise in inequality since 1980.

There were some good news stories over the period. Between 1980 and 2000, employment earnings among lone mothers rose by 39 per cent as a result of rising employment rates. This led some observers to conclude that “tough love” policies in some provincial social assistance schemes, notably B.C., Alberta and Ontario, had been effective. Colleagues and I showed, however, that most of these gains were the result of changes in the demographic composition of lone mothers: by 2000 lone mothers were simply older, better educated and hence more likely to be employed than in 1980.6

The outstanding exception was Quebec. Quebec lone mothers had the largest employment gains in the 1990s (9.4 percentage points) and by 2000 their employment levels were four percentage points higher than in the rest of Canada. Demographic changes in Quebec accounted for only 28 per cent of the growth in lone mothers’ employment in the 1990s, results that are consistent with conclusions concerning the effects of liberalized child care provisions in that province.7

The interesting puzzle here is that while the surge in income inequality measured after taxes and transfers did not appear until the latter half of the 1990s, the growth in market income inequality had been underway for at least a decade and half by then. In their new study of the impact of taxes and transfers on income inequality, Marc Frenette, David Green and Kevin Milligan show that growth in market income inequality was roughly similar in the 1980s and the 1990s.8 The ratio of those at the 90th percentile to those at the 10th percentile grew by 12.8 per cent between 1980 and 1990 and by a further 11.4 per cent between 1990 and 2000. As they demonstrate, this was because income redistribution was rising between 1980 and 1995, offsetting changes in the labour market and families.9 These changes did not result in less inequality; rather, the welfare state was running hard to keep inequality levels stable.

Importantly, rising income redistribution through the 1980s and the first half of the 1990s was largely driven by changes at the provincial level, a result of rising transfers under social assistance and surtaxes on top-earning families. As a result, the level of income redistribution peaked in 1995 but then declined because of cuts to social assistance, changes in UI and the elimination of surtaxes on high-income families.

However, the important conclusion is that inequality would have risen even in the absence of these cuts.10 The big story of the 1990s was not so much one of retrenchment – the tax-transfer system in 2000 was still much more redistributive than that of the 1980s – but rather of the failure of the tax-transfer system to expand and to keep pace with underlying trends toward increasing inequality in labour markets and families. In short, at the national level, the welfare state was “running out of gas.” And most of the action was at the provincial, not the federal, level. As Frenette, Green and Milligan conclude, “The steady after-tax income inequality of the 1980s arose because the tax and transfer system increased its redistributiveness over that decade. In the 1990s, the tax and transfer systems ceased becoming more redistributive, allowing the changes in pre-tax inequality to pass through to increases in after-tax inequality.”11

We still need Robin Hood

So what should we make of all this? Big changes in labour markets and especially families have been driving the inequality surge. As a result, welfare states have had to run fast simply to keep the income distribution standing still. The impact of labour market and family changes, moreover, have been especially severe for young adults (those under 35). Their work careers have been starting later and their earnings relative to older adults have been falling since the 1980s. As a result, we have made relatively little progress in reducing child poverty. While the social and economic life course has changed, the biological life course has not. Because of biology, young adults (under 35) are still the parents of the majority of our young children – 60 per cent of those under six – and no social policy can change this.

If we look at the world from the vantage point of the young adults who are entering the labour market today and who will be supporting our pensions and health care system for the next 30 years, things look a little gloomy for the bottom half.

The world our thirtysomethings of today are entering is very different from the one encountered by the young cohorts of even a quarter century ago. A new high-inequality equilibrium in the distribution of family earnings has emerged and appears to be a relatively permanent feature of our postindustrial world. The cohorts turning 30 this year and those now completing their schooling will make up the core of our prime-age workforce well into the 21st century.

Changing the labour market would help the most. Most people get most of their income from employment for most of their lives. Full employment and decent wages for the employed, not generous welfare states, were the primary objective of social democrats and reformers like John Maynard Keynes and William Beveridge who sought to shape postwar societies in the 1940s. Countries could afford generous welfare states under conditions of high employment and high wages at the bottom of the scale, but not otherwise.

But labour markets change only over the long term. Canada has lots of low-wage jobs by international standards, and that has ever been so. Cross-national differences in wage structures of the current magnitude are the product of longstanding historical differences in wage-bargaining institutions and labour market regulation. Institution building and reform are by definition long-term projects.

Early childhood education programs intended to compensate for the weak cultural capital of many low-income parents have come into favour in many policy circles. Economists like human capital investments of this sort, and so do I. Improving people’s capabilities, as Amartya Sen argues, should always be at the top of our agenda. But the distribution of human capital among those now entering the labour market is unlikely to change very much over their working lives. Early childhood education looks like it could help a lot – but not until the kids who benefit enter the labour market some 25 years in the future.

I value the search for alternatives and complements to the tax-and-transfer welfare state – Robin Hood. And the Quebec experience demonstrates that it’s not just about Robin Hood. While improved transfers were a factor in Quebec’s better performance, Quebec’s child care program is also an “employment” program, enabling single moms and women married to low-wage men to enter the labour market and raise the living standards of their families. Nevertheless, my conclusion is that we are probably going to need more rather than less Robin Hood for some time to come.

Continue reading “The Inequality Surge”

What policies will reduce poverty – and how do we pay for them?

Social policy debates about income distribution have shifted sharply in the past few years. For decades, Canadian attention was focused almost exclusively on the ups and downs of the “poverty rate.” The one great success of the Occupy Movement in 2011 was to shift attention to the larger issue of income inequality and the phenomenal rise in the incomes of the top 1 per cent, a trend that has continued. As a result, “poverty talk” has faded somewhat.

Is it time for another look? One reason to think so is that in normative terms, trends in inequality immediately bring us back to asking questions about poverty.

In his influential A Theory of Justice,1 John Rawls concluded that a rise in inequality is morally acceptable if it is to the absolute benefit of the least well off. He attached substantial ethical weight to absolute – not relative – improvement for the poor. We know that income inequality has risen significantly since the 1980s. So a reasonable question to ask is whether the forces that have generated the inequality surge have been accompanied by improvement in the living standards of the poor. At first glance, the question may appear odd. If inequality rises, doesn’t this mean that the poor are worse off? Not necessarily. Poverty is measured relative to the “middle,” not to the top. By and large incomes in the middle and the bottom have moved in tandem in the past three decades, while top incomes have gained.

A second reason for reviving poverty talk is the analytical turn in poverty policy that has been with us at least since the 1990s. Often expressed with the metaphors of “social investment” and “active labour market policy,” these new ideas were widely adopted by the OECD and the European Union, and have been very influential in Canada.2 They remain with us today.

The core idea of both metaphors was that we could more effectively reduce poverty by structurally replacing “redistributive” (cash benefit) strategies with “productivist” (employment-centred) strategies. In other words, instead of spending money on “after-the fact” cash benefits to individuals and families, we should be spending money on “before-the-fact” programs that raise employment and wages with new social investments in early childhood education, job training and active labour market policies that bring jobs to people.

My reading of the evidence has led me to four basic conclusions.

Conclusion 1: The rise in income inequality between 1980 and the mid-2000s brought little or no improvement in the absolute living standards (Rawls’s criterion) of Canada’s low-income population. Some evidence, however, suggests modest improvement since the mid-2000s. And of interest to many (but not my main topic), there has been no improvement in relative living standards of the poor over the whole period.

My evidence for the first part of the claim is drawn from Lane Kenworthy’s Progress for the Poor.3 Kenworthy is the author of several major works on income inequality. His concern here is with absolute, not relative, living standards. He sets out to assess the extent to which economic growth in the affluent democracies has led to rising incomes among the poor and to identify the policy instruments that matter. Standard poverty measures, he points out, measure relative poverty, and there are good reasons for this approach. However, relative poverty rates can rise even as the incomes of those at the bottom and their living standards improve.

His alternative is to examine the relationship between economic growth and incomes at the 10th percentile (p10) of the income distribution for the period 1979 to 2007 (for Canada 1981–2004) in 17 rich democracies. We can think of this as an exercise in social accounting: to what extent have the benefits of economic growth (per capita GDP) “trickled down” to improve living standards of the poor in recent decades? His conclusion is that, on average, across the 17 countries, growth has tended to be good for low-income families – but not in Canada.

Across the 17 countries, on average, an increase of $10,000 in per capita GDP was associated with a rise of about $3,000 for a single individual and $6,000 for a four-person household at the 10th percentile. In contrast, p10 incomes show essentially no increase over this period in Canada as well as in Australia, Germany, Italy, Switzerland, Britain (until 1995) and the United States (except for 1995–2000). The bottom line in Kenworthy’s analysis through the mid-2000s is that there has been considerable “trickle down” in many countries since the end of the 1970s but not much in Canada.

6_Myles_figureKenworthy’s Canadian results hardly come as a surprise. Among others, Andrew Heisz has documented the stagnation in low incomes for over a quarter of a century from 1976 to 2004. Figure 1, taken from Heisz, shows little change in either p10 or p20 incomes.4 Until the mid-1990s, however, the top and middle also shared in this income “stagnation.” The movement of the top away from the middle and the bottom is largely a phenomenon of the economic recovery that occurred beginning in 1996. As Garnett Picot, René Morissette and I showed, the recovery of the late 1990s did not bring the reduction in “poverty intensity” experienced during the economic expansion of the 1980s.5

Both Kenworthy’s and Heisz’s results, however, only bring us to the middle of the last decade. There is some evidence that after a quarter century of stagnation, real incomes in the middle and the bottom half of the income distribution did begin to rise in real terms during the 2000s. The rise was not large enough to offset the growth in income inequality (real incomes in the top half also rose).6 But there is some modest evidence of “trickle down” after 2006. I draw this conclusion from inspection of long-term trends in Statistics Canada’s Low-Income Cut-Off (LICO).7

Statistics Canada routinely produces two “low income” or “poverty” measures, the LICO and the Low Income Measure (LIM), based on somewhat different poverty concepts. The LIM can be thought of as an inequality-type measure: it simply asks what proportion of the population is in families with less than 50 per cent of the median income in the year of observation. The only way the LIM can move is if incomes at the bottom rise or fall at a different rate than incomes in the middle. By this standard, the Canadian poverty rate in 2010 was where it was in 1979 but somewhat higher than in 1989 or 1999. Since 2000, it has been relatively stable at about 13 per cent of the population. No “progress for the poor” by this criterion.

But as Kenworthy notes, LIM-type measures are insensitive to changes in the absolute or real living standards of the poor: hence his p10 criterion. The LICO, which “fixes” the reference year for comparison (in this case 1992), is closer in spirit to the concept of absolute or “real” living standards of those at the bottom. The only way the LICO rate can move up or down is if real (absolute) living standards decline or improve relative to real living standards in 1992. So what does it tell us?

Unlike the LIM, the LICO is very sensitive to the business cycle and secular trends are less visible. The LICO rate hit a historic low of 10.2 per cent in 1989 at the top of the business cycle of the 1980s but then rose to 15.2 per cent in 1996, a result of the recession of the early 1990s. It began falling as recovery set in after 1996 and by 2006, at 10.3 per cent, was back at 1989 levels. Between 2006 and 2011 it declined further to 8.8 per cent, a new historic low, providing evidence for some modest trickle-down in the latter part of the 2000s – but not much of a gain relative to economic growth over the period.

Conclusion 2: Thus far, little evidence supports the claim that “productivist” strategies are an effective replacement for “redistributive” (cash benefit) strategies. But there is a time horizon problem here. Cash benefits still matter a lot in the short and intermediate term because the presumed benefits of social investment and active labour market policies by definition will take a long time to mature. Early childhood education, if effective, will show results only several decades from now.

Where does trickle-down come from? There are two potential sources. The first is the labour market – higher employment and rising wages. The second is income from government transfers. Lane Kenworthy’s conclusion is that rising transfers in line with GDP growth was the main source of trickle-down in the advanced democracies through the mid-2000s.

Kenworthy decomposes p10 income trends in the 17 countries into three components: earnings, other market income and net transfers (transfers minus taxes). He concludes that in almost all countries with significant trickle-down effects, earnings and other market income of low-end households increased little over time. Government transfers to low-end families produced the trickle-down in most countries by raising transfers in line with real GDP growth. In Canada, Australia and Germany both earnings and transfers were essentially flat over the period and trickle-down was negligible. In the United States, p10 households experienced a rise in earnings between 1995 and 2000, but there too net transfers to p10 families were essentially flat over the period.

The major reason that transfers provide the key is that for many people at the 10th percentile, non-employment is a fact of life: they have little labour to sell even in the best of times.

Countries in the European Union took a particularly aggressive stance toward shifting emphasis from cash benefits to employment-based strategies in the 1990s and embedded this commitment in the EU Lisbon Treaty of 2000. Thus far, according to Bea Cantillon and Frank Vandenbroucke, the results have been disappointing.8 Despite deliberate attempts to transform “passive” welfare states based on cash benefits into social investment states, and despite some success at increasing employment, European data through the 2000s suggest a “poverty standstill.” The EU uses a more luxurious cut-off to measure poverty (60 per cent of median income) than Canada, but over the 1990s and 2000s, by this standard, income poverty remained stuck at about 16 per cent, and poverty rates in the traditionally successful Nordic countries actually rose somewhat.

In the concluding chapter, Cantillon suggests that the social investment strategists promised too much. Programs such as early childhood education and job training, she points out, are most likely to advance the relatively strong, not the comparatively weak. Some people are simply difficult to activate relative to their peers.

To Cantillon’s caveat of promising too much, I would add the caveat of too soon. I am a big fan of employment-based strategies, but they are likely to show effects only in the long term.

Consider the labour market. Canada’s unusually high level of low-wage employment was highlighted in OECD reports in the late 1990s and more recently in a Statistics Canada analysis by Sébastien LaRochelle-Côté and Claude Dionne, who follow the OECD practice of defining low-wage work as the percentage of full-year, full-time workers who fall below two thirds of the country’s median earnings.9 By this standard, nearly 25 per cent of Canadian and U.S workers are in low-wage employment compared to 13 to 16 per cent in Germany, Spain, Austria and Belgium and between 7 and 11 per cent in Australia and the Scandinavian countries.

Elsewhere, I show with census data that none of this is new.10 The proportion of full-time, full-year workers taking in less than two thirds of median earnings rose from 22 to 24 per cent over the 30-year period from 1971 to 2001. Our low-wage economy is undoubtedly a major flaw in our social architecture but it has always been so, largely as a result of the comparative weakness of Canadian wage-setting institutions. Canada, like the United States, simply lacks the centralized wage-setting institutions that equalize wage rates in Continental and northern European countries.11 Given the decline of labour representation both at the firm level and in national politics, there is little likelihood of this changing anytime soon.

Will empowering individuals in the labour market through better childhood education change all this? I hope so. But the benefits will only be realized several decades from now when the kids start to work.

This observation leads to my third conclusion.

Conclusion 3: To experiment with productivist strategies, Canada, like all advanced democracies, faces what is often called a “double funding” problem. “Double funding” is a familiar issue in policy analysis. If you want to change your transport system from highways to railways, you still have to fund highways until your new high-speed railways are in place. In the case of the low-income issue, you have to fund “redistributive” (cash benefit) programs until you know that your “productivist” strategies are in fact having the desired outcome.

So let’s imagine that some as yet unelected government wants to shift gears and build an employment-based welfare state. As an old-fashioned social democrat, I am all for that. As Gunnar Myrdal argued, we can afford a luxurious welfare state only if most people are employed at decent wages, and hence pay taxes, for most of their lives. Shifting gears, however, will be expensive and take time. If Canada wants to place its bets on early childhood education, for example, that will require a lot of new “investment.”

There are lots of changes on the margin within our current budget that could improve things, and we should make them. For example, the Caledon Institute has pointed to elimination of pension income-splitting among seniors, which costs $1 billion a year and mainly benefits wealthy seniors. But big institutional changes usually take time. Serious employment-centred agendas have a long time horizon.

The problem is demography. Let’s imagine we prepare our 20-year-olds and the cohorts that follow them for the labour market much better than earlier cohorts, so that low-end wages begin to rise. That’s great! But it will take another 20 years until they are 40 and enough of the cohorts that follow them are in the labour market with appropriate skills to show big effects on the overall distribution of wages and earnings.

Consider the time trajectory of old age poverty, one of Canada’s success stories. By the mid-1990s, Canada’s old age poverty rate was among the lowest among the OECD countries, rivalling even egalitarian Sweden. Our big pension reforms, however, came in the mid-1960s. Even in 1980, Canada still had one of the highest old age poverty rates among the developed countries. It was only over the next decade and half that we began to see the payoff from the 1960s legislation.

Why was that? The answer is time and demography. The first cohort of retirees to receive full Canada and Quebec Pension Plan benefits turned 65 in 1976, the second cohort to receive full benefits turned 65 in 1977, and so on. It took several decades for the older cohorts without such benefits to die out and be replaced by cohorts covered by the new system.

Income distributions are a bit like supertankers. They can’t turn on a dime. And experiments are experiments: some will succeed while others will fail. The success rate of public-sector experiments is no different from that of experiments in the private sector. Most new firms disappear in a few years. There is risk in both sectors.

Since the time horizon on new investments is a long one, we need lots of what is called “patient capital”: investors (tax-paying citizens) who are prepared to wait for their return. My favourite example is a religious order that opened schools in small towns in the Dominican Republic in the 1950s where there were none before. It took 12 years before they had their first high school graduates and another four or five years before their graduates came back from university as teachers, nurses and doctors to meet the needs of their local communities. That’s “patient capital.”

To engage in new “social investments” requires money. Since the investments have long time horizons, we face a “double funding” problem. We can’t simply shift revenues from a “passive,” income-transfer welfare state to an “active” employment-centred welfare state at a point in time and expect “spot-market” results.

Until our new strategies begin to pay off, we have to fund both. And here is where the rubber hits the road. Since 2000, total government revenue in Canada has declined from 44 to 38 per cent of GDP. As Alex and Jordan Himelfarb note, all political parties have been trying to avoid the “tax-and-spend” label in recent elections.12 We’ve been on a downward trend since the 1990s. So if we have to wait for returns on new social investments, what do we do in the meantime? In the short and intermediate term we still need cash benefits, the “Robin Hood” welfare state.

Conclusion 4: Double funding requires higher public investment and higher taxes from everyone, not just the “rich.” But I doubt that “higher taxes from everyone” is a campaign platform that will get me elected prime minister.

I am all in favour of taxing the rich at higher levels than today. However, I doubt that it will do much to solve the poverty or inequality situation we now face. The top 1 per cent makes lots of money, but because they are so few, and have good accountants, I suspect that higher taxes on the rich will not turn the inequality-poverty dial very much.

Sorry folks! Most of us will have to pay more, including many in the middle. But “paying more” refers to “gross,” not “net,” taxation rates. To establish “net” rates (taxes less benefits),we have to include the benefits (including services) that most people receive from their contributions to both the public good and their own futures.

The “productivist,” employment-centred, turn in Canadian policy debate has been a good one, in my view. To steal a phrase from a recent volume on taxation, productivity is not a four-letter word.13 How else do we raise living standards? Raising productivity has been the strategy of the Swedish left for many decades. They were able to combine policies aimed at eliminating low-wage, low-productivity jobs with wage ceilings at the top. We don’t have the wage control option at our disposal because of our decentralized system of bargaining. So we will have to look elsewhere.

To motivate the majority to participate in a productivist strategy, however, requires that the majority experience a payoff. That’s what happened from the 1950s to the 1970s. Since 1980, in contrast, the gains of economic growth have not done much for those at the bottom or even the middle. We have puzzles to solve.

 

Notes

1 Cambridge, MA: Harvard University Press, 1972.

2 See David Green and James Townsend, “Drivers of Increasing Market Income Inequality: Structural Change and Policy,” in Keith Banting and John Myles, eds., Inequality and the Fading of Redistributive Politics (Vancouver: University of British Columbia Press, 2013), pp. 65–92; Jane Jenson, “Historical Transformations of Canada’s Social Architecture: Institutions, Instruments and Ideas,” in Banting and Myles, eds., Inequality and the Fading of Redistributive Politics, pp. 43–64.

3 Oxford, England: Oxford University Press, 2011.

4 Andrew Heisz, Income Inequality and Redistribution in Canada: 1976 to 2004, Analytical Studies Branch Research Paper Series (Ottawa: Statistics Canada, 2007).

5 Garnett Picot, René Morissette, and John Myles, “Low-Income Intensity During the 1990s: The Role of Economic Growth, Employment Earnings and Social Transfers,” Canadian Public Policy, Vol. 29 (2003), pp. 15–40.

6 The income trends documented by Kenworthy and Heisz, however, have to be carefully separated from trends in what has happened to the top 1%. Both rely on national income surveys (SCF/SLID) that are unable to track top 1% incomes or earnings. Results from Michael R. Veall’s paper “Top Income Shares in Canada: Recent Trends and Policy Implications” (Canadian Journal of Economics, Vol. 45, No. 4 , pp. 1247–72), based on taxation data, show that top 1% incomes since the 80s began rising in the 1990s and continued their upward rise in the 2000s.

7 See Brian Murphy, Xuelin Zhang and Claude Dionne, Low Income in Canada: A Multi-Line and Multi-Index Perspective (Ottawa: Statistics Canada, 2013).

8 Bea Cantillon and Frank Vandenbroucke, Reconciling Work and Poverty Reduction: How Successful are European Welfare States? (Oxford, England: Oxford University Press, in press).

9 Sébastien LaRochelle-Côté and Claude Dionne, “International Differences in Low-Paid Work,” Perspectives on Labour and Income, June 2009, pp. 5–13.

10 John Myles, “Postponed Adulthood: Dealing with the New Economic Inequality,” in Edward Grabb and Neil Guppy, eds., Social Inequality in Canada: Patterns, Problems, and Policies, 5th edition (Toronto: Pearson, 2009), pp. 317–23.

11 Michael Wallerstein, “Wage-setting insitutions and pay inequality in advanced industrial societies,” American Journal of Political Science, Vol. 43 (1999), pp. 649–80.

12 Alex Himelfarb and Jordan Himelfarb, “Introduction: Tax is Not a Four-Letter Word,” in Alex Himelfarb and Jordan Himelfarb, eds., Tax is Not a Four-Letter Word: A Different Take on Taxes in Canada (Waterloo, ON: Wilfrid Laurier University Press, 2013), p. 2.

13 Himelfarb and Himelfarb, eds., Tax is Not a Four-Letter Word.

 

John Myles is Emeritus Professor of Sociology and Senior Fellow of the School of Public Policy and Governance at the University of Toronto.