The Benefits of Public Spending

A year and a half ago I published an updated study on tax incidence in Canada. It found that the Canadian tax system is progressive up to the middle of the income distribution, then flattens out before becoming regressive at the very top. (Interestingly, a short piece on the US tax system by Citizens for Tax Justice just came out the other day. They come to a roughly similar conclusion, although the US system is progressive further up the distribution before becoming regressive; ultimately it is hard to compare due to differences in methodology.)

Of course, taxation is only one side of the equation. How progressive is the other side – public spending – in Canada? The CCPA revealed an answer to this question (that has been keeping bureaucrats at the Ministry of Finance awake in the middle of the night) by Hugh Mackenzie and Richard Shillington. Canada’s Quiet Bargain: The Benefits of Public Spending finds that, on average, Canadians benefit by $17,000 per year from public services, with more than half of that coming from health care, education and transfer payments. The benefit is much higher than that for the lowest income groups, then the average benefit (in dollar terms) flattens out through the remainder of the distribution. The authors also break these numbers down by level of government and category of public spending.

My only complaint is that the authors do not present their results by deciles and as a percentage of income, although the latter is easily approximated from the figures. Combined with my study, it shows that taxes, transfers and public spending together are highly progressive through a good chunk (up to the seventh or eighth decile) of the distribution. After that it is harder to tell if the progressive result vis-a-vis income is enough to offset the regressive taxation incidence within the top decile. This next step would enable what is called a “full incidence” framework of the impact of the public sector on distribution in Canada.

Anyway, the authors deserve a big hand, as this exercise is more complicated than one might think at first glance. And this is the first such study of expenditure incidence published in Canada (please tell me if I missed something). Plus, there is a neat calculator on the webpage linked above that allows you to calculate the benefits you receive from public spending.

Here is the CP story on the study via the Globe.