Writing in the Ottawa Citizen, Macdonald-Laurier Institute Managing Director Brian Lee Crowley writes that criticism of Canada’s tax and transfer system has been way overblown.
Canada, he says, is already doing lots to help those Canadians who are least well-off.
By Brian Lee Crowley, April 24, 2015
Most of us learned from our parents that it is better to give than to receive. Apparently, though, a lot of people were playing hooky when this childhood lesson was taught. Their iron rule is that no matter how much is given, it is never enough, and those who receive are always shortchanged–at least where taxes are concerned.
The echoes of this were loud around the federal budget tabled April 21st. One typical trade union commentator had this to say: “This budget does far more harm than good in addressing the gap between workers and the richest Canadians. With this budget, that gap will only continue to grow.”
On this account, Canada has been letting down the least well off by reducing taxes, thereby leaving less to spend on much-needed redistribution. That would be a stinging indictment if true. Is it?
There are two questions here. The first is whether the Canadian state has become less generous to the least favoured. The second is whether more spending is the best way to help them.
On the first Philip Cross, former chief economic analyst at StatsCan, recently wrote a paper in which he examined just how “progressive” Canada is, progressivity meaning the degree to which the rich pay for and the poor benefit from government programmes. Contrary to those sounding the “progressive” alarm, Cross found that far from being less generous, Canada has become more so in recent decades.
How can that be when so many commentators compete to denounce the growing unfairness of Canada’s tax system? The answer is that critics have mistaken the cause of growing inequality, which is rising market incomes for people at the top, driven by globalisation and technological change, and not tax cuts or falling progressivity in Canada’s fiscal arrangements.
Not convinced? To see how the less well-off fare in Canada, it is not enough to look at where the tax load falls. You also have to look at the distribution of benefits too. You only see how progressive Canada is after you’ve counted not only all the taxes paid, but all the pensions and EI and other transfers received.
When you look at this complete measure, Canada is highly progressive and has become more so over the decades. For example, the bottom 60 percent of Canadians receive more in benefits than they pay in taxes, so they are net beneficiaries and the benefits get larger the farther down the income scale you go. As Cross notes, transfers from government make up over half of all incomes in the bottom fifth of households and nearly one-quarter of income for the second lowest fifth.
Moreover transfers contribute much more to the progressivity of Canada’s system than taxes do. A person in the top fifth of earners earns $14 in the marketplace for every $1 earned by a person in the bottom fifth. But after transfers, the ratio falls to just under $7 to $1. Taxes then reduce the ratio to about $5.40 to $1.
And as you’d expect in a progressive system, the better off pick up the tab. The top two fifths of income earners are the only ones making a net contribution (they pay more in taxes than they get in benefits), and the top fifth is responsible for 80 percent of that net contribution. That’s progressive.
As for the second question, about whether more transfers would help even more, Munir Sheikh, the former head of StatsCan, has dug into this question as well for my institute. His answer? Despite lots of talk of welfare reform in recent decades, our tax-and- transfer system still traps too many people in low income.
My conclusion? Given our already high degree of progressivity, helping the least well-off Canadians now is done most effectively by equipping them with skills and improving job opportunities and incentives to work. Even higher taxes and increased transfers? Not so much.
Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.