An Alternative Budget: Making Jobs, Not War
This piece was initially posted on the Globe and Mail’s online business feature, Economy Lab. Join the comments section!
For 18 years I’ve been part of a national project in participatory budgeting called the Alternative Federal Budget.
Each year dozens of national and community organizations representing millions of Canadians convene over a six month period, debating and costing out measures that reflect the priorities and values of most Canadians, if polls are any indication.
This year two vastly different economic realities have emerged out of a context of fragile recovery and economic uncertainty.
Yesterday, Statistics Canada reported that household wealth is again on the rise. But so, too, is household debt.
The cost of almost everything is climbing: energy, prescription drugs, tuition fees, and food.
Retirees worry about the vulnerability of their pensions and benefits. Near-retirees worry that they can’t afford to retire.
People thrown out of work during the Great Recession worry that they will never again find jobs at their old wages and benefits. Young workers wonder when they will get a job at all.
Parents fret about what more they have to do to make ends meet, now that it takes two to get into and stay in the middle.
Everyone wonders if the health care system will be there when they need it.
This year’s federal budget seems ill-disposed to meaningfully address any of these serious financial insecurities. But this year’s Alternative Federal Budget takes them on, one by one.
It also proposes taking advantage of the lowest interest rates in economic history and high unemployment rates to address the $200 billion infrastructure deficit across the country, creating jobs and building a platform for future prosperity.
And it outlines a focused and future-looking green strategy for the nation’s homes and businesses.
Sound too expensive? Consider what is being spent on fighter jets and jails, or corporate tax cuts with dubious job-creating benefits.
The Alternative Federal Budget uses the same pot of money, but allocates it differently. In fact, we may come in under budget. As the Parliamentary Budget Officer has noted, it’s not clear how much money the military and prison security shopping spree will cost us over the next 30 years. Even the official estimates of the revenues lost by the tax cut agenda are in question.
The truth is Canadians can afford more of just about anything we want. Canada is the ninth largest economy in the world, with a fraction of the population of other large economies. But the distribution of our economic power and strength has grown increasingly lopsided.
Not since the 1920s have so few Canadians captured so much of the gains of economic growth. Not since the 1920s have so few Canadians controlled so much of our wealth. Not since the 1920s have Canadian millionaires paid such low taxes.
The Alternative Federal Budget proposes a legacy tax on incomes over a quarter of a million dollars. In fact it proposes two new tax brackets, one on incomes over $250,000 and one on incomes over $750,000. Currently all incomes above $129,000 are taxed at the same rate, 29%. The proposed rates on the new brackets are slightly higher (32% and 35% respectively), but still take in less tax than the top federal rates in the U.S. (33% on incomes over $171,851 and 35% on incomes over $373,651).
The legacy tax would affect less than 1% of Canadians. Some say it’s not worth going after such a small group, but modest increases in the top tax rate raise enough additional revenue to create a universal $10 a day child care program or kick-start a pharmacare program that could save Canadians $10 billion a year when fully implemented.
The Alternative Federal Budget not only proposes cancelling future corporate tax cuts; it suggests rolling them back to their level in 2007.
That’s because the corporate tax cut agenda is a high-cost, low-benefit bargain. The stated goal is more investment and more jobs, but across-the-board corporate tax cuts rewards companies whether they create or kill jobs, whether they invest in Canada or elsewhere. By 2013 the new corporate tax rate will have stripped $13.7 billion a year from the public purse, enough to fully eradicate poverty in Canada and return tuitions for post-secondary back to 1992 levels.
Both measures have long-term investment and job creation impacts that are comparable to tax cuts, with much more obvious and immediate benefits in people’s day-to-day well-being.
Canada already has the lowest corporate tax rates on business investment in the G7. Our major competitor, the U.S., has the highest in the OECD nations. We can afford to ask corporate Canada to contribute to our collective economic recovery.
Are these measures controversial? You bet they are. Do we need an honest discussion about the trade-offs between spending and taxes that lie ahead? Without question.
We are calling on profitable corporations and Canada’s richest citizens to play their part in securing Canada’s economic future.
We can’t be successful without them. And they can’t be successful without us.
The AFB Section entitled “Restoring a Fair and Progressive Tax System” is kind of selective in its presentation and could be improved by noting the following facts:
1) A 1% increase in GST would raise about twice as much revenue as the suggested increase in the top tax brackets. It’s also not clear what “legacy tax” means.
2) The inclusion rate for capital gains tax was 50% from 1972-1988. It is therefore the case that the 75% inclusion rate was the aberration, not the return to the original 50% rate. By the way, Michael Wilson introduced the ISIP (Indexed Securities Investment Plan) in the early 80’s, (similar to the suggested inflation indexing of gains) but it didn’t catch on and was put out of its misery in less than two years.
3) Canada has a “deemed disposition on death” approach to assessing capital gains on death: by way of contrast in the U.S. the cost basis of securities is stepped up on death, so no capital gains tax is due. It is therefore seriously misleading to suggest that Canada needs an estate tax (like the U.S.) without mentioning that Canada already taxes capital gains on death (unlike the U.S.). Arguably the current Canadian treatment is more equitable than the U.S. treatment.
4) We’re already into the third year of TFSA’s so the cap would have to be $15,000 unless a retroactive change is contemplated. It is also seriously misleading not to mention that TFSA’s are much better for low-income people than RRSP’s, because eventual withdrawals do not affect GIS eligibility.
TFSA for low-income people? The greatest beneficiaries will be those who can afford to lock-in for the long term $10,000 for themselves and their spouse at the beginning of each year, an action which hardly fits the profile of low and most middle income earners. In addition, the tax loss to Government as investment amounts of the affluent are increasingly tax-sheltered will mean greater pressure to cut back on expenditures for health, education and social services. Those who advise the poor to get rich through the Tax-Free Savings Account should recognize that their advice mimics those famous words ‘Let them eat cake!’
Larry, you are missing my point. A low-income person who saves through an RRSP is penalized when they take withdrawals (relative to a TFSA) because RRSP withdrawals count as income for means-tested programs, whereas TFSA withdrawals don’t. That’s pretty simple. Jon Kesselman proposed it back in 2001 (as the “tax-prepaid savings plan”) and St. Christopher House also ran with the idea (as the “registered development savings plan”): see
(http://www.stchrishouse.org/modules/ImageAV/images/rdsp.pdf)
rcp, I’m afraid it’s you that’s missed the point. You refer to “A low-income person who saves…” but as Larry has indicated, such people cannot exist! When covering living expenses is a day to day challenge that drives family debt, saving is a fantasy.
So while your “arguments” seem valid, they rest on false premises and therefore yield false conclusions – a problem endemic to your strain of policy.
Thanks for your carefully considered comments, lrl. Did you actually read the St. Christopher House link? (My guess: no.) Because it talks about perverse incentives in the tax and welfare systems and how to fix them – something progressive economists would presumably be interested in.
TFSAs may well be slightly better for low income earners than RRSPs, but the point is that both TFSAs and RRSPs do basically SFA* for low income earners, while significantly reducing revenues. So it’s kind of irrelevant to act like it makes a BFHD** which you reduce.
At that, average ordinary people have barely heard of these newfangled things and have little or no understanding of what they are or why they might be better; it’s the rich people who have tax lawyers to tell them to jump on the latest loophole and will thus have been early adopters of such new instruments.
More important would be to increase the Canada Pension.
*Sweet Fuck All
**Big Fat Hairy Deal
Forget low income earners. I just filed taxes and the package asked me if I would like shelter the UCCB in a TFSAs in my child’s name. 3% on 1000$. The bank fees would kill me.
People who think poor people don’t save because of the tax structure are literally FITH. Although I applaud their egalitarian instincts (I think cf., Nick Rowe).
I Should add, on this score I am with Stephen Gordon. Lets just give the poor direct transfers and smooth out the lumpy claw back problems.
Thanks, PLG and Travis, for your insightful yet marginally profane comments. The fact that the TFSA had a 43% take-up rate at the end of its second year may indicate that economists are not always on the leading edge.
(http://opinion.financialpost.com/2010/12/07/tfsa-take-up-rate-almost-doubles-from-year-ago/)
And yes, I agree that wrapping a GIC paying 3% and calling it a TFSA is pretty much suboptimal. A self-directed account is much much better, especially invested in low-cost ETF’s – but that is not what the bank teller will tell you – not because they’re evil, but because they probably don’t know, and if they do they’re not licenced to tell you that.
RCP you are missing the point. It does not matter if the return is 6 or 9 or 12%. Poor people do not put the UCCB in a savings account, tax sheltered or not. They do weird things like pay rent, buy groceries and put gas in their inefficient combustion engine to go to their low paying job.
PS. normally I like to profane on average. Sometimes, just sometimes, I find on the margin is sufficient.