Finance Committee on April 25th, 2013

[Mark Adler, Conservative, York Centre, ON]

Yes.

[Dr. Ian Lee]

I hadn't prepared for that, although I wrote a comprehensive exam on that about 25 years ago during my Ph.D., so I'm stretching back into my memory.

Very quickly off the top of my head, I think most policy analysts think that the “Great Society” was a failure. I'm thinking specifically of Professor Aaron Wildavsky, who was the first dean of the graduate school of public policy at UC Berkeley. He was a very brilliant individual. He came to Carleton University a few years ago before he passed away. He spoke about the Great Society and went into—call it—the pathologies of the Great Society. There were a lot of failures.

I know this sounds jingoistic on my part, but I do think that we've adopted a more balanced approach in Canada.

[Mark Adler, Conservative, York Centre, ON]

Dr. Muzyka, could you also comment on that?

[Dr. Daniel Muzyka]

I think there are a lot of parts of the “Great Society” program that we've seen haven't functioned over time. I would tend to agree that the more balanced approach has probably functioned a little bit better.

[Mark Adler, Conservative, York Centre, ON]

Would you say, then, that our experiment has led to greater or less income mobility? Assuming that it has led to less income mobility, would that have created more income inequality, because you don't have the incentive to aspire to anything more, as opposed to the American experiment, which tended to be the opposite?

[Dr. Daniel Muzyka]

Our income mobility is actually higher, in terms of our ability to go up through the income ranks, if you will, the quintiles.

[Mark Adler, Conservative, York Centre, ON]

How successful has that been, that upward movement?

[Dr. Daniel Muzyka]

We have actually been fairly successful in terms of income mobility. It's interesting, and I know that Professor Wilkinson could reflect on this. If you look at families, I think the statistics in the U.K. show that about 50% of the income gap that your parents have stays with you. If I remember correctly, in Canada it's about 19%. It's a difference in mobility. In Canada we have a higher mobility than in the United States as well.

[Mark Adler, Conservative, York Centre, ON]

So in your opinion, the vertical mosaic doesn't really apply any longer here in Canada.

[Dr. Daniel Muzyka]

I'm sorry, I'm not familiar with the phrase.

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Mark Adler, Conservative, York Centre, ON]

You talked a bit about the Gini coefficient, which is on a scale of zero to one. Canada is twelfth, the U.S.A . is seventeenth.

Where are we missing? Why are we twelfth? Why aren't we in the first one to three, or one to four? What are we missing?

[Dr. Daniel Muzyka]

These are complex sets of factors, really. You've heard from several people that it's really hard to pick it apart.

One of the things that I emphasized earlier that's rather interesting is that if you look at the Gini index, the ones that have the lowest Gini index are trying to raise theirs a bit. They need a little bit more incentive for people to try.

I just came back from Denmark. Sweden was number one in the Gini index pool. They had the lowest Gini index. They moved back from that. They had the largest rise in the Gini index so they wanted more inequality to provide incentive.

[Mark Adler, Conservative, York Centre, ON]

In terms of—

[The Chair, Conservative, James Rajotte]

Thank you.

I'm sorry, you're out of time, Mr. Adler. I apologize.

We'll go to Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair.

Thank you to all of our witnesses for being here today.

I want to start my questioning with Professor Boadway, but I invite others to jump in.

Sir, I think you've talked in some of your research about the federal and provincial tax systems becoming less progressive through changes that have benefited mostly high-income earners, such as reduced marginal income tax rates for those earning the highest incomes, and through the introduction of federal non-refundable tax credits, which you've talked about, and through the reductions of capital gains taxation.

I want to ask you to talk a little bit more, because on your wish list this morning you talked a bit it about the desire to make all tax credits refundable. I'd like you to talk a little bit more about that specific topic, and I invite others to do so as well. If you could, comment on any fiscal impacts such a change would have.

[Dr. Robin Boadway]

Thank you for giving me the opportunity.

Non-refundable tax credits are in the tax system primarily to make the income tax system more progressive.

We now have the technical capability of making them refundable, since the introduction of the HST credit, the child tax credit, and so on. There's no region in logic why non-refundable tax credits should be non-refundable. Making them refundable would essentially convert the income tax system into the analog of a negative income tax system, and would be much fairer.

How would we finance this? I think the way we would finance them would be by making them more targeted. Accompany refundability of tax credits with making them more income tested, and reduce the value as you go up the income scale. I think it's a perfectly feasible thing to do.

[Murray Rankin, NDP, Victoria, BC]

Do any others wish to comment on that, on the non-refundable?

Professor Corak.

[Dr. Miles Corak]

I defer to Professor Boadway on this. I think this is absolutely correct.

[Murray Rankin, NDP, Victoria, BC]

All right. May I then take you to the other part that I read from your research? You've done an awful lot on, and spoke again today about, reducing capital gains taxation. You suggested, in particular, eliminating the dividend tax credit, which I presume the lowest quintiles just don't have the opportunity to take advantage of. By definition, it affects and helps those in the higher income bracket. I'm assuming that's the implication.

What about the fiscal? Have you studied the fiscal implications and the consequence of taking that off? Because the claim is it's an incentive to investment, the dividend tax credit, in Canadian companies. What would the consequence be, and is it worth doing so if there are negatives?

[Dr. Robin Boadway]

There's always a trade-off between redistributive equity and consequences, inefficiency consequences, but I think in this case they would be minimal. The dividend tax credit applies only to dividends earned in unsheltered assets. Most people in the lower, middle, and even getting towards the upper income classes can, in principle, nowadays put all of their savings into sheltered assets, which even though some of them are held in Canadian corporations are not eligible for the dividend tax credit. The dividend tax credit for one thing is unfair because it only goes to people who are receiving dividends outside of sheltered assets.

I also think it's unnecessary. The rationale for the dividend tax credit is to compensate people for corporate taxes paid at source on the income that generated those dividends in the first place. But in a global economy like we have now with free movement of capital all around the place, it seems better to assume that corporate income taxes are not borne by shareholders. They're shifted to labour and other factors of production. The rationale for the dividend tax credit is not there; the fairness is not there. What only remains are the comments you made that it may give an incentive for these entrepreneurs either not to save or to put their money elsewhere. In my view, that's probably relatively minimal.

[The Chair, Conservative, James Rajotte]

You have one minute.

[Murray Rankin, NDP, Victoria, BC]

Mr. Holden, you made a number of very helpful comments. One of the recommendations you made was that we encourage labour mobility. You talked about Saskatchewan as one example. We have a constitution that guarantees labour mobility rights. What can the federal government do to achieve that goal, in your judgment?

[Michael Holden]

There are a few things. Removing barriers to interprovincial trade is something that can help in that area. One of the things I was going to suggest, which just got cut, was that the government does provide some tax credits for individuals to move across the country or to move for distances larger than I believe 40 kilometres. Those could be expanded upon or increased.

One of the things I think should not be touched.... Sometimes it's mentioned that the equalization program, as it exists in Canada, acts as a barrier to labour mobility. I do not agree that's the case at all.

[Dr. Daniel Muzyka]

You come from a province that's trying to reduce the barriers to mobility. TILMA, for instance, was a good first step in terms of reducing barriers. We have accreditation barriers between provinces that shouldn't exist. There is a long list of those that reduce labour mobility in what is a comparatively small population.