Thank you for this opportunity.
The motion proposes an examination of best practices that reduce income inequality and improve GDP per capita. Turning to GDP per capita, Canada's recent productivity growth has been slow. In terms of output per hour, growth averaged about 4% per year until the early 1970s, but it has fallen since. This century, it's averaged only 1% per year. Moreover, the gains the economy has generated have gone disproportionately to the top of the income distribution. Between 1986 and 2010, the after-tax, after-transfer incomes of the bottom 90% of the population increased by about 19%, after adjusting for inflation. The incomes of the top 1% increased by 77%. The incomes of the top 0.01% increased by 160%, to about $4.7 million per year, after tax.
There are big policies on both the productivity and inequality fronts. I think you'll probably hear about some of that today. Instead, I've elected to focus on just three smaller policy directions that might draw support from across the political spectrum. These are not silver bullets. At best, I would describe them as silver BB pellets. They're small.
The first policy direction relates to the regulation of corporate finance. Randall Morck, a distinguished professor of business at the University of Alberta, argues that the Canadian corporate sector underperforms because of a low level of shareholder democracy and high insider power. He notes that the Yale School of Management concluded that Canada had the highest rate of insider trading among all developed economies. Low shareholder democracy and high insider power might contribute to high executive salaries, but even if not, a weak commitment to broad shareholder accountability makes it harder to raise money on Canadian capital markets and to replace tired management with innovators.
Professor Morck suggests continued attempts to introduce national securities regulation to prevent a race to the bottom by provincial regulators. He also suggests tax disadvantaging shares with different levels of voting power because such shares enhance the ability of insiders to control corporations.
The second policy direction relates to intergenerational mobility. Children should have a good chance at success, regardless of the status of their parents. Long-run productivity growth is higher when society gets the best out of everyone, not just the best out of those who were born with relatively high incomes. The current published evidence suggests that Canada has had a high intergenerational mobility, by international standards, probably due to relatively equal access to high-quality schooling and prenatal health. Provincial budget crunches may jeopardize this. Federal policy interaction with the provinces may become even more important.
The third policy direction relates to taxation, perhaps particularly appropriate to talk about on April 30—I got mine in last night. I do not believe we currently have the evidence to be sure that an increase in marginal tax rates at the top will raise much tax revenue. Perhaps a better, immediate approach is to eliminate those tax expenditures that both distort productive activity and benefit the affluent. I strongly support the removal of the labour-sponsored venture capital fund tax credit in the recent federal budget as well as changing the dividend tax credit so that it cannot exceed the corporate tax paid in the case of small business. I would suggest the proposed study examine other measures, such as the employee stock option deduction.
As former Rotman business school dean, Roger Martin, writes in his book, Fixing the Game, stock options contributed to the financial crisis by giving an incentive to corporate executives to focus on the information that the company released, not on true corporate performance, or, as Arianna Huffington somewhat harshly put it in her review of his book, “We’ve gone from an economy based on making things to one based on making things up.”
Staying with the tax system, I support moving towards refundable tax credits. A small example is the children’s art tax credit and the children’s fitness credit. Elimination of these would save $220 million for other purposes. But if they are to exist, I believe they should be refundable. As I have written elsewhere:
In effect these subsidize the participation in the arts and sports activities for children in all families except those too poor to be subject to personal income tax, probably the only families for which the subsidy might make an appreciable difference.
I thank you for your attention.