Finance Committee on April 25th, 2013

[The Chair, Conservative, James Rajotte]

I call this meeting to order, the 116th meeting of the Standing Committee on Finance.

Our orders today, pursuant to the order of reference of Wednesday, June 13, 2012, are for continuing our study of income inequality in Canada.

I want to welcome all of our witnesses here today and also our witness in the U.K. Thank you so much for being with us here this morning on this very important study. I will list all the individuals who will be presenting.

First of all, from Queen's University we have Professor Robin Boadway.

Welcome.

From the University of Ottawa we have Professor Miles Corak. From Carleton University we have Professor Ian Lee. From the Canada West Foundation we have senior economist Michael Holden. We have the president of the Canadian Medical Association, Anna Reid.

Welcome to the committee.

From the Conference Board of Canada we have the president and CEO, Daniel Muzyka. From the Frontier Centre for Public Policy we have senior policy analyst Benjamin Eisen.

Welcome to you as well.

From the United Kingdom we have Professor Richard Wilkinson.

Professor Wilkinson, can you hear me okay?

[Dr. Richard Wilkinson, Emeritus Professor, Social Epidemiology, University of Nottingham, As an Individual]

Yes I can, thank you.

[The Chair, Conservative, James Rajotte]

Thank you for joining us this morning.

Each of you will have five minutes, maximum, for an opening statement, and then we'll have questions from all the members.

We'll begin with Professor Boadway, please.

[Dr. Robin Boadway, Professor, Department of Economics, Queen's University, As an Individual]

Thanks very much for inviting me. I submitted a brief that you will have access to. I will take my five minutes just to highlight the main things that come out of that brief.

What I would argue is that the tax transfer system has become less redistributive, while inequality has increased, and that not enough targeting exists in the system. Too many tax expenditures are going to the better off. As the federation becomes more decentralized, groups of persons for whom the provinces are responsible have fallen behind and obtain little support from the federal government. More generally, horizontal imbalances in the federation threaten our social fabric.

I made several specific proposals, which are discussed in more detail my brief. Let me just run through them very quickly. These are intended to make the tax transfer system fairer and more resilient to economic shocks, while at the same time maintaining efficiency and tax revenues.

Here's my wish list. I would make all tax credits refundable, including the current non-refundable ones. I would condition many of them to income, the way we condition the GST credit. I would enhance disability tax credits and make them available to all provincial disability recipients. I would improve the EI-welfare nexus, so that the transition from one to the other is smoother.

A far-ranging reform would be to make the EI system two-tiered at the federal level. The first tier for a certain period of time would be like the current system, which replaces lost income. The second tier, for people who stay on a little longer, would be based on need. Then the fallback would be the provincial welfare system. I would make training and employment services available to all workers, whether they're on EI or not. I would finance EI from general revenues, rather than from the current regressive payroll tax.

On the capital income side, I would eliminate the dividend tax credit and make the taxation of dividends, capital gains, and interest more even. I would rationalize the corporate tax to make it distortion-free and make it a tax on supernormal profits, or so-called rents.

With respect to federal-provincial tax room, I would do everything to prevent further erosion of the federal share of tax room. I would return the equalization system to a formula-driven system. I would make sure that the social transfers to the provinces grow at the average rate of growth of provincial program spending, and I would make them conditional on provincial tax capacities to enhance the equalization system.

With respect to equality of opportunity, the current post-secondary education programs at the federal level serve middle- and upper-income persons quite well. Low-income persons would benefit from more targeting of tax benefits and from enhancing the Canada learning bond and Canada student grants programs. The post-secondary education system in Canada is actually in crisis, and I would consider creating a post-secondary education grant parallel to the CHT and CST, the Canada health and Canada social transfers.

That's my five-minute wish list.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

I'll turn to Professor Corak, please, for yours.

[Dr. Miles Corak, Professor, Graduate School of Public and International Affairs, University of Ottawa, As an Individual]

Good morning, everyone.

My written submission focuses on concrete policy measures that are meant to speak to the fifth of the committee's terms of reference, to “provide recommendations on how best to improve equality of opportunity and prosperity for all Canadians”.

I take equality of opportunity to mean that children can become all that they can be regardless of family background. In particular, adult outcomes like earnings and incomes are the result of talent and energy, not position or privilege. Parents play the central role in determining the life chances of their children through the quantity and quality of time they spend with them and by the monetary resources they have to invest in them. Money is not everything, but money matters.

The recommendations I would ask you to consider are intended to support families in their role as primary caregivers. They are intended to offer insurance against inequalities in both monetary and non-monetary resources, and to offer adequate support to the least advantaged.

Firstly, the committee should give consideration to significantly increasing the working income tax benefit, the WITB. The design of this program is a best practice in the provision of income support. It should be the main instrument for preventing inequalities at the lower end of income distribution from becoming too great. The committee should examine the implications for expenditures and work incentives of raising the benefit level so that most working Canadians will take home roughly one-half the median income. It should also consider reducing the rate at which benefits are phased out, so that the WITB extends into the range of lower-middle family incomes.

Secondly, the committee should give consideration to doing this in conjunction with the reform of the employment insurance program that changes part of the program into wage insurance, particularly for longer-tenured workers suffering a permanent layoff. This would in effect deliver benefits for the design inspired by the WITB. This would encourage laid-off workers to accept new, lower-paying jobs, knowing that wages will be topped up to some significant fraction of their old wage.

Thirdly, if tax and transfer policy is to encourage increased engagement of parents in the labour market to obtain adequate income to support their children, then there is also a need to recognize that families are increasingly time-stressed. Parents face not just labour market risks, but also a host of demographic risks associated with marital disruption, child illness, the onset of disabilities, or other non-market activities. The committee should give consideration to building and generalizing recent changes in the EI program by allowing parents to take a leave from work throughout their lives for reasons they deem important for their family.

The committee should give consideration to introducing a system of personalized accounts in the EI system from which families could draw, depending upon the extent of their surplus. The eligibility rules of the program could be relaxed and lower-income families could be given more of a public subsidy in these accounts. All families would have the flexibility to use their surplus to support a leave from work according to their own timing and purpose.

Finally, the committee should be aware that there have been significant increases in the fraction of total income accruing to a small minority of the population. In part, this has increased income inequality, but its importance for equality of opportunity is that over the longer term it will also change wealth inequality.

Wealth inequality has also been on the rise in Canada, but up to now this has been driven by increases in home equity and pension assets. Inheritances have played a role, but not a major role. This may well change in the future because the increase in top income shares is likely to persist. At some point, this concentration of income will be felt in wealth, and eventually in bequests. In the federal system of taxation, this will become a significant gap that contributes to inequality and inequality of opportunity.

Accordingly, the committee should examine more complete taxation of all sources of income, including all sources of capital income. Alternatively, it should give consideration to an inheritance tax and the disincentives of that in the manner discussed by, among others, the OECD.

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you, Professor Corak.

We'll go to Professor Lee, please.

[Dr. Ian Lee, Professor, Carleton University, As an Individual]

Thank you for inviting me.

I had prepared what I thought were some elegant empirical slides and then your committee decided to double the presentation, to double the time. Fair enough, and I think many other witnesses will likely present some excellent empirical data, so I completely rewrote my presentation. I have the slides there as background.

I have a deeply personal interest in the subject of inequality, social hierarchies, and barriers because at the age of 18, in 1971, I dropped out of grade 12 high school. However, for those who blame society, I think I would like to suggest are wrong. I dropped out of high school, and society couldn't attend my classes and do my homework when I stopped going. The real reason was that at 18 I thought life was a big party, and I wanted to party as much as possible. I did not drop out because I experienced low income or income inequality. That has causality running backwards. Dropping out of high school caused my subsequent low income that placed me in the bottom quintile, because I was not qualified for higher-paying jobs.

However, after two years of partying, I became dissatisfied with this life. Being left behind and being at the bottom motivated and drove me to do something completely different. I applied to many different companies and, after many rejections, I was hired at the very bottom by a large American company called Avco. They proceeded to train me, and I want to emphasize that word “train”. They trained the dickens out of me. I eventually became branch manager at the age of 24.

But far more importantly for this committee, they offered to reimburse me for university courses successfully completed if I agreed to enrol part time as a mature student, which I did. I started at 20 and graduated 10 years later—completely part-time—at the age of 30. Then, partly because of the training and the education, I was recruited by the Bank of Montreal, where I became a mortgage manager.

The point of this narrative is that education is the most radical liberating force in the world, for it involves the development and education of the most valuable asset in the entire world: the human mind. Education enables high school dropouts to be come mortgage managers in large banks, and it enables high school dropouts to become professors who appear before the Canadian House of Commons finance committee to discuss inequality from first-hand experience.

Now, let's talk about inequality. As the philosopher Hannah Arendt taught us, equality is the absence of difference—ten equals ten—while inequality is the presence of difference—five is not equal to ten. Restated, we live in a world characterized by plurality, diversity, and heterogeneity. Each is a synonym for inequality or difference.

The academy is an excellent example of contemporary societal inequalities. There are full professors, such as some people here today, who earn much larger salaries than associate professors, who in turn earn much larger salaries than assistant professors. Moreover, full professors often have no teaching load at all, while associates and assistants teach four, five, or six courses.

However, I am not suggesting that the university system is unfair or exploitative or that full professors should not possess the pronounced advantageous privileges and benefits of being a full professor. In vigorous defence of this, they earn and deserve the significantly higher salaries, status, and radically reduced teaching loads that accrue to them. Although the university creates significant inequalities, it is not unfair and it is not illegitimate. The university is a microcosm of the larger society of corporations, NGOs, the public sector, politics, sports, and entertainment, each with its own hierarchies and inequalities.

However, as Professor Deirdre McCloskey—formerly Donald McCloskey, prior to her gender transformation—an economist and historian at the University of Illinois, has argued in over 400 peer-reviewed articles and 18 books, the market economy has generated far greater benefits than any other system in history. She notes what she calls “the Great Fact”. After thousands of years of humans around the world living on a dollar a day, after 1800, almost overnight, we went to $150 a day in today's dollars, an increase of between sixteen- and a hundredfold.

The outcome of this great fact, she argued, is that the poor have benefited the very most from the market economy. This suggests that we should be facilitating and fostering innovation, creative destruction and growth, which she characterized as Schumpeterian growth, instead of protectionism that produces inequalities by benefiting crony capitalists—think of the pernicious supply management.

In conclusion, I do not question the statistics that will be presented today showing the correlations between social pathologies or—in much more accurate English—bad decisions or bad behaviour on the one hand, and low income and income inequality on the other. However, I profoundly disagree with those who claim income inequality causes bad decisions or bad behaviour. Bad decisions and bad behaviour cause income inequality by dropping out of school....

In my slides, I have one critical slide which shows that the people in the two bottom quintiles in Canada and the U.S. have the lowest levels of education. This is why governments must much more aggressively encourage the 45% of adult Canadians who do not have post-secondary education to return to school—“levelling up”, as it's characterized by the Public Policy Forum, the Canadian literacy network, and the Canadian Association of Manufacturers & Exporters—and I would argue, by tying EI, welfare, and other government assistance programs to re-enrollment and retraining. It may be argued that some are not capable, but I think this is an inaccurate assumption.

If we really want to address inequality in this country, we must attack these inequalities through a levelling-up program, because post-secondary education is the most radical and the most effective policy of all in addressing inequality. I know it, because I did it.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Professor Lee.

We will go to Mr. Holden now, please, for your presentation.

[Michael Holden, Senior Economist, Canada West Foundation]

Good morning.

I'll start my presentation with some brief observations about income inequality trends in Canada, and then follow up with some suggestions about the types of federal policy action that would be most beneficial.

Income inequality is a challenging subject. This is something that's politically sensitive and ideologically polarizing. Most of us would probably agree that too much inequality is a bad thing. It leads to social exclusion, crime, political disengagement—but the question is, how much inequality is too much? The answer to that is subjective, and that makes the thoughtful, unbiased study of inequality very difficult. What makes matters worse is that data on income inequality is very easy to spin. Anyone with an agenda, whether on the right or the left, can easily create the impressions they wish through selective presentation of numbers.

For example, earlier in your testimony, you may have heard that Canada is more unequal today than it was 20 or 30 years ago. Someone may have said that inequality has held steady since the late 1990s. In the past 10 years, the bottom 20% of Canadians has seen the fastest growth in after-tax incomes. In the past 10 years, the top 20% has captured 46% of all income growth. Now, all these facts are true. So how is this possible? How can some argue the rich are getting richer, but others say inequality has remained unchanged since the late 1990s? It really comes down to a matter of selective interpretation of numbers.

I have an example here. Suppose we have a society of two people; one earns $100,000 a year and the other earns $10,000. Now, let's say each receives a 10% raise. Have we become more unequal? Some will say, “No, both are now 10% richer.” Before, one made 10 times as the other, and now, one still makes 10 times as much as the other. Nothing has changed. Others would argue that things have in fact become worse. The gap between the two people used to be $90,000, now it's $99,000. A full 91% of all the income gains that year went to the richer person. They're wider apart than ever. These are two interpretations of the same thing, and they create very different impressions.

My advice to the committee in studying the numbers as they're presented is generally to be wary of information that relies heavily on dollar figures. Percentages, relative growth, and the ratios comparing the rich and the poor are what matter.

A more extreme example will show you what I mean. Suppose that in that two-person example our salaries were $1 and $2 a year, and the next year they went up to $98 and $100. Then, in that case, is inequality lessened? I'm sure most people would say yes, but if you believe that in the first example I gave that inequality had widened, because the richer person captured most of the income gains, then logically you would have to argue that the same was also true in the second case. They used to be $1 apart, now they're $2 apart.

Now, my point is not to cast doubt on the existence of income inequality or its importance as a public policy issue, but rather just to serve as a warning that we distract ourselves from the real issue when we get caught up arguing about the selective interpretation of numbers. Moreover, I submit that equality of opportunity and poverty reduction matter far more than equality of income.

So how do we improve equality of opportunity and keep income inequality from deteriorating? I'd like to draw your attention to four specific issues.

First, the federal government must improve economic prospects for aboriginal Canadians. This is especially an important issue in the west. The federal government needs to better foster economic development on aboriginal reserves. It needs to greatly enhance the quality of on-reserve K-to-12 education, and it needs to improve aboriginal skills training and labour force engagement.

Second, policies that address income inequality must not impede labour mobility. In fact, the federal government needs to do better than just remove barriers; it needs to encourage labour mobility. There is a desperate need for workers in the west, especially in Saskatchewan. The unemployment rate there now is 3.9% and industry-specific labour shortages are already impeding growth in that province. Meanwhile, we have surplus labour capacity elsewhere in the country. It makes no sense to spend money on policies and programs to kick-start economic development in struggling regions, when doing so effectively prevents other parts of the country from growing at their full potential.

Third, we need a strong focus on education and skills training. On the education side in particular, there's the ongoing mismatch between the skills that students are developing and those in demand by employers. The stubborn social bias favouring universities over technical schools has to end, and we need to ensure that rising tuition does not create a barrier to entry for poorer students.

I'll close on the issue of taxes. Our progressive tax system already partially smooths out income inequality. It could probably do more, but we need to tread carefully on tax policy. Government revenues today already depend heavily on the contributions of the rich. The wealthiest 10% collect 35% of income and pay 55% of taxes. These are also the most mobile Canadians. We can very quickly solve income inequality by driving the rich out of the country, but our tax revenues would evaporate, taking away our capacity to implement programs and policies to help the poor. This is not to say that increasing taxes on the richest Canadians should be off limits, but it would be more useful to focus on measures to help lower-income earners and help reduce poverty than to focus unduly on penalizing the rich.

Thank you for your time.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Holden.

We'll go to Ms. Reid, please.

[Dr. Anna Reid, President, Canadian Medical Association]

Good morning.

I'm very pleased to bring the Canadian Medical Association's perspective on income inequality to your committee.

You may wonder why the CMA, which represents over 78,000 physician members, is actually concerned about income inequality. We know that every day, patients with illnesses of every kind crowd our clinics and our hospitals. When we look at the health outcomes of these patients, we find that only 25% are determined by the health care system. Another 25% are determined by biology and genetics.

Having a much greater impact are such factors as the state of a person's housing, whether they get enough to eat, how educated they are, and what kind of experiences they had in their early childhood. These social determinants of health in fact account for 50% of the health outcomes.

The most influential of these determinants is income. We know that if you're rich in Canada, you will be healthier than if you are poor. The poor experience higher rates of suicide, mental illness, disability, cancer, heart disease, and chronic illnesses such as diabetes. We know that the poor are 1.9 times more likely to be hospitalized. The poor are three times less likely to fill prescriptions and 60% less able to get needed tests because of cost. The poor live shorter lives. Poverty in childhood can be a greater predictor of cardiovascular disease and diabetes in adults than later life circumstances and behavioural choices.

There's a cost to this poverty and the disparity between the rich and the poor. The poor tend to consume more health care services than those of higher socio-economic status. According to one estimate, about 20% of total health care spending in Canada can be attributed to income disparities alone. A study done in 2011 by the Saskatoon Poverty Reduction Partnership found that over the course of a year, low-income residents consumed $179 million more in health care costs than middle-income earners.

While economics are important, so too are fairness, dignity, and compassion. Canada's doctors are concerned that as a nation we are not doing enough to address these factors.

Among the CMA's recommendations, we suggest that as federal departments develop new policies, they put them through the test of a health impact assessment to evaluate the potential effects on the health of Canadians. Under such a process, greater scrutiny might have been accorded to changes to the qualifying age for old age security and to new rules for employment insurance, both of which will have far-reaching consequences on some people's incomes. Every action that has a negative effect on health will lead to more costs to society down the road.

But it's not just about what we doctors think. The CMA has been conducting a series of public town halls around the country asking Canadians about how the social and economic conditions of their communities affect their health. We've gone from Calgary to Hamilton to Charlottetown, as well as online, and we're hearing how low incomes are undermining Canadians' health.

This public response is really not surprising. According to the Conference Board of Canada, more than one in seven children in Canada live in poverty. And let there be no doubt—this poverty will limit the ability of these children to live lives that are as long and healthy as children who come from wealthier families. Success in ameliorating seniors' poverty is acknowledged as one of the great policy achievements of recent decades. Building on that success, the federal government should explore and establish programs that eliminate poverty for all Canadians.

In conclusion, the CMA commends this committee for studying this very important issue. Income inequality matters to physicians, because it translates to health inequity. That runs counter to everything that we've been taught to believe as physicians and that we work towards achieving.

It's worth noting that countries reporting the highest population status are those with the greatest income equality, not the greatest wealth. Canada's a wealthy country, and there's no reason why it cannot have greater income equality too.

Greater income equality can reduce the burden of disease in Canada, lessen the pressure and costs on our health care system, and help ensure that every Canadian has a chance to be a productive, contributing, and healthy member of society. Canada's physicians believe that every Canadian deserves a chance to live a healthy life, and I believe that how well we are able to achieve health equity for our citizens should be a measure of the humanity and soul of our nation.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll hear now from Mr. Muzyka, please.

[Dr. Daniel Muzyka, President and Chief Executive Officer, Conference Board of Canada]

Thank you, Mr. Chairman and committee, for inviting me.

We submit that this is an issue that is important to review and monitor and to create a public policy framework around. My comments and the data behind them can be found on our website, in a section called “How Canada Performs”.

How is inequality measured? There are three ways.

One, the Gini coefficient, which I'm sure you've heard about, ranges from zero to one, where zero is perfectly equal distribution of income. Canada ranks 12th out of 17 peer countries on the Gini index, with number 1 being Denmark, and the worst performer, number 17, being the U.S. As we did, 12 of 17 peer countries experienced an increase in the Gini coefficient from the mid-1990s. The countries with the lowest Gini coefficients during that period, Sweden and now Denmark, have either implemented or are looking at measures to increase their Gini coefficient.

The second way to measure it is to divide the population of income into groups such as fifths, or quintiles. The facts are that the largest gain has been seen in the top quintile—something that's been noted before—and the lowest increase has been in the third or middle quintile. The middle class is truly being squeezed.

The third way to calculate it is to calculate the gap in average income between, let's say, the richest 20% and the poorest 20%. As is also the case for most of our peers, the gap in Canada is growing. This is due largely to technology and globalization, but also to tax policy.

Because of the use of different measures, income inequality can be open to different interpretations. But it is clear under all measures that inequality increased in Canada during the 1990s, something that has happened with a majority of our peer countries. We are higher than we used to be, but we are somewhere in the middle of our peer group, and we are not getting worse. Nor do we have the extent of the issues being raised in the fairness debate by our neighbour.

There are two other factors, often raised in any discussion of income inequality, that complicate discussion of the issue. First is income mobility. The ability to move between income ranks is often raised in a discussion of inequality. The second, absolute versus relative incomes, is usually a discussion about how a rising tide raises all boats.

Is income inequality really an issue in general? Experience and objective research tell us that it can be if it rises too high, but there has to be some inequality for markets to function and to create incentives for effort and investment.

The negative impacts of high levels of inequality include a break in social cohesion and a rise in political instability, a consequential decrease in foreign and domestic investment, a decrease in economic growth potential—and this is from a recent IMF study—and a waste of human potential. If lower-income individuals have more limited access to education, skills training, and employment, we will not be fully utilizing the skills and capabilities of all of our citizens. Another issue is a more limited ability by individuals in lower-income ranks to apply their skills to pursue entrepreneurial opportunities. Finally, there is a limiting of the government's ability to deal with economic shocks by raising taxes or cutting spending.

There are also arguments that higher levels of inequality support economic efficiency, innovation, and entrepreneurship. Does this mean we don't have to worry about inequality? No. We want to maintain good mobility and we want to worry about structural inequality, because not everyone has the means or access to move between income groups. But mobility does not remove all of the other negative impacts of higher inequality, including those on growth potential, use of skills, etc.

Are we where we want to be? Should we actively address this issue? The answer is that we probably should. On balance, we can do a little better. But like most economists, I have a second opinion. Do it in a forward-looking way rather than through an immediate structural shift. Acting precipitously has more downside than upside. The IMF rightly warns that poorly designed efforts to reduce inequality could distort incentives and undermine growth. One needs a win-win policy implemented over time.

How could we go about it? Are there some levers? You've heard a number of them today. Invest in education: early education, primary education, secondary education, and post-secondary. You have to address all of them. Invest in early childhood development. Recent research strongly suggest there's a huge payback. Implement active labour market measures to boost employment. Improve access to capital for those in lower-income ranges—microfinance, for instance. Remove the welfare wall built into the tax system, and eliminate distortions and improve efficiency in the tax system.

What are the conclusions? Under all measures, inequality increased in Canada in the 1990s. We are higher than we used to be. Again, we're somewhere in the middle of the pack, and we're not getting worse. This is an issue that deserves close attention. Inequality can undermine Canada's economic performance and prevent individuals from reaching their full potential. Numerous policy levers exist and can be refined to actively address the issue.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We will now go to Mr. Eisen, please.

[Benjamin Eisen, Assistant Research Director and Senior Policy Analyst, Frontier Centre for Public Policy]

Thank you very much for the invitation to appear today. The very existence of this study reflects the fact that there is a growing consensus around the world that evaluations of national economic performance shouldn't rely exclusively on measures of overall growth in gross domestic product. We should also take into account the extent to which the benefits of growth are broadly shared across the entire income distribution. This is a welcome development.

In Canada, as in many other affluent countries, high earners have enjoyed a large share of overall income gains in recent decades while real income growth through much of the rest of the income distribution has been somewhat slower. This sluggish income growth in the middle and bottom of the income economic distribution over the course of several decades should certainly be taken seriously. There are effective policy responses available, which I'll discuss later and which I expand upon in my written brief.

However, the committee should also recognize that there are powerful demographic and economic forces that are driving strong income growth at the top of the distribution and that these forces are likely to continue pushing in the direction of continued income inequality growth.

First, Canada's population is aging. Generally speaking, there's a greater income inequality among older workers than younger workers. The wages and salaries of highly skilled workers tend to increase faster over time than the wages and salaries of less skilled workers, leading to greater income disparities towards the end of careers than existed at the beginning. It's for this reason that the American economist Tyler Cowen went to far as to say much of the measured income inequality growth that we've seen is a matter of demographic fiat. Perhaps that's somewhat of an overstatement, but it's a very important factor that has contributed to income inequality growth in North America.

Secondly, there are global economic market forces related to globalization and technological change that are continuously driving up demand for highly skilled labour. This rise in demand for highly skilled labour is likely to continue, driving significant income gains for high earners. There are many policy options that can help increase the after-tax incomes of low- and middle-income families. The committee should study and pursue these types of reforms while recognizing that continued income gains at the top are likely. The objective should be to identify policy options that can contribute to robust income gains for families in other parts of the economic distribution as well.

The OECD has performed extensive research on policy strategies designed to mitigate income inequality growth. Their research deserves careful attention from Canadian policy-makers. OECD research suggests that some policy options represent a trade-off between the objectives of reducing income inequality and promoting economic growth. The key examples they cite are increases in corporate and personal income tax rates, which the OECD observes would likely decrease income inequality because these taxes are so progressive, but would also likely hinder economic growth because of negative effects on labour use, productivity, and capital accumulation.

However, the OECD research also identifies a number of policy approaches that do not entail this trade-off. In fact, there are other strategies likely to produce what they describe as a double dividend, which can help mitigate income inequality while contributing to growth. I suggest that the committee focus its attention on this second category of policy responses. Strong economic growth is absolutely essential to Canada's efforts to reduce poverty and ensure adequate government revenue generation. Policy responses to inequality that come at the cost of lost growth are likely to be self-defeating.

The OECD describes several broad policy strategies that are likely to produce this double dividend I've described. Their advice includes expanding the quality and reach of education. We've heard several suggestions along those lines today. They also include efforts to promote the successful economic integration of immigrants. In 2012, the Frontier Centre for Public Policy published an e-book by Professor Bryan Schwartz of the University of Manitoba, detailing strategies to reduce barriers to occupational freedom for new immigrants to Canada, many of whom have difficulty having credentials recognized. Efforts we can make to improve their successful economic integration will create the double dividend of reducing income inequality between immigrants and native-born Canadians while at the same time contributing to overall national income.

Finally, on strengthening tax policies that increase the after-tax incomes of low- and moderate-income families, strengthening the working income tax benefit is one that immediately comes to mind, a policy that might be paid for by eliminating deductions that benefit the affluent. All these approaches are applicable in the Canadian context, and I discuss them all in greater detail with specific recommendations in my written brief.

There are many policy strategies that can help promote strong income growth through the income distribution, and many of these strategies can help strengthen the economic performance of the country taken as a whole. There need not be a trade-off between mitigating inequality and promoting growth. By proposing these types of policy strategies, the committee can help promote economic opportunity for all Canadians while contributing to our country's prosperity in the years ahead.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will go now to Professor Wilkinson for your five-minute opening statement, please sir.

[Dr. Richard Wilkinson]

I would like to use this as an opportunity to first emphasize the kind of damage that inequality does to a society. We went through a whole range of outcomes, looking at different levels of health, child well-being, and mental illness, homicide rates, imprisonment levels, teenage birth rates, drug use, kids' math and literacy scores, and social mobility in rich, developed countries, and found that all these things are worse in more unequal countries.

People, I think, have been surprised that something like income inequality can affect so many quite different outcomes. The explanation is that, basically, what we're saying is that problems related to social status within society—in that all these problems are more common at the bottom of the social ladder—get worse when we increase the social status differences in a society. They don't just get a little bit worse; these problems get anything from twice as common up to ten times as common. All these problems tend to move together in different societies, so the U.S. does worse than any of the other developed countries or nearly worse than any of the others on homicide rates, obesity rates, mental illness, drug abuse, teenage births. Life expectancy there is amongst the lowest in the developed world. All those problems are better in the more equal countries—the Scandinavian countries and Japan.

We don't have time to go into the causal mechanisms in detail, but basically what income inequality does is intensify all the ways in which class and status imprint themselves on us throughout life. The differences in performance of more and less equal societies are so large—as I say, with sometimes tenfold differences in some of these outcomes—because although these problems are worst at the bottom of society, with greater inequality the whole social fabric of a society is affected and the problems become worse amongst the vast majority.

These are not simply problems of poverty. Michael Marmot, who is perhaps the pre-eminent world expert on health inequalities, often says you can take away all the problems of poor health and poverty and still have most of the problem of health inequalities left. The health inequalities are a gradient going right across society, so even the people just below the richest have worse health than the richest. It's not a problem that you can understand simply in terms of unemployment, homelessness, and things like that. We're all part of this picture of health inequalities and also the gradients in the other problems I've mentioned.

The reason Canada does better than the U.S.A. on so many of these outcomes seems very clearly to be because you are more equal. In analyses of homicide rates and death rates from all causes, Canadian provinces come very much where you'd expect them to on the more equal end of the U.S. states.

I think people sometimes imagine—and we've had criticisms from the far right suggesting this—that we've manufactured the data by picking and choosing and so on. We never pick and choose data. We never decide what data is comparable. We simply download the data from WHO or OECD or the UN human development website, and include all the data they provide for the countries we're looking at. There's absolutely no picking and choosing. Yet, we find this consistent pattern, a tendency for more unequal countries to do worse across the whole society.

The methods we've used in our book, The Spirit Level, are very simple and straightforward because we were trying to communicate a picture to a wider public. But in medical journals in particular, the epidemiology journals, there are much more sophisticated analyses. For instance, colleagues from the Harvard School of Public Health did an analysis of multi-level models, looking at the effects of income inequality on health, after controlling for individual income and often education as well.

[The Chair, Conservative, James Rajotte]

Professor Wilkinson, could I get you to wrap up, please? Then we'll go to questions from the committee members.

[Dr. Richard Wilkinson]

Yes.

There are much more sophisticated analyses, and many of the analyses have been covered—in as much as 200 papers—in the academic journals on health and inequality and on homicide and inequality. There's massive literature on this, and some of it very sophisticated. What's in our book is not the whole picture.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Perhaps I'll explain, in response to Professor Lee, that we did combine the two panels this morning. We felt it would be better to have a larger discussion over a two-hour period. I hope everyone can stay for the full two hours.

I'll remind everyone that members have a very short time for questions and answers. I'll ask members to direct their questions, and witnesses to be as brief as possible in their responses.

Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

Good morning to all the witnesses. Thank you for joining us here today. We do only have five minutes, so we have a short timeframe to ask questions in.

I was struck, when I read your book, Professor Wilkinson, by the impact, the vast impact, of inequality on people at all social levels, and the variety of outcomes.

To Professor Boadway, you discuss in your brief a rising trend of income inequality in Canada. Can you describe when you think this trend began, and what some of the main contributing factors are to rising inequality in Canada?

[Dr. Robin Boadway]

This is a very big question.

As one of the other witnesses said, it probably goes back to the early 1990s. Many things have happened in the world to cause inequality in OECD countries, including more competitiveness for manufacturing industries. We've seen a decline in manufacturing industries and the middle-income jobs that go with the industries. We've seen a competing down of redistributive policies because of mobility of capital and highly skilled people across countries.

I think it's hard to pinpoint exactly what the cause of it is. My concern is really more that we haven't responded as well as we could have. At the same time as inequality has increased, our policies have become less and less effective at dealing with it.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Just on that, because I know you're also a tax specialist, one thing we've seen is a trend to more specialized tax credits. I'm wondering about your take on how specialized niche tax credits fit into the overall framework of a progressive tax policy system.

[Dr. Robin Boadway]

Well, tax credits are there for different reasons. Some tax credits are there to impart progressivity to the system, such as personal tax credits, disability tax credits, seniors tax credits, and so on. Other tax credits are there to try to encourage people to behave in certain types of ways—giving to charity, giving political donations, riding public transit, putting your kids into fitness programs, and so on.

My concern with these tax credits is that they're not very effective, for one thing. In many cases they're just credits that go to people who would have done the same thing anyway. Public transit is a good example. Most people who get public transit are not changing their behaviour in the least possible way.

Moreover, the credits tend to be almost regressive. They tend to go to people in the middle class. The educational savings tax credit is a good example of that. In some sense the RESP is a good program, but it's not very well targeted.