The Bad, the Ugly and the Whatever Comes Next After Ugly

The National Post had a big headline the other day which read, 15 years of stagnation: TD blames debt and taxes as take-home pay flatlines and was based on a study done by TD Economics.

Personally, I recommend that, any time you see a newspaper article which makes reference to some study, you either go read the study¹ and then read the article, or just skip the article because, from what I've seen so far, you're likely to get a pretty distorted view if you rely on one of the media's 'study interpretation' pieces for information.²

So let's look at the study first and then the Post interpretation afterwards.

The TD study, titled, "IN SEARCH OF WELL-BEING
Are Canadians slipping down the economic ladder?" tries to address the question of whether Canadian standards of living are improving or not.

I wasn't two paragraphs in before it became clear that in the author's minds, well-being = standard of living = after-tax income, but we'll save the whole issue of whether you can measure your well-being by the size of your pay cheque for another day.

The heart of the report is that while GDP per capita has gone up 25.5% since 1989, after-tax income per capita has only gone up 9.3% over that stretch. Furthermore, since a greater percentage of the population is working now than in 1989, the gain in after-tax income per worker is only 3.6%.

First off, the choice of dates is a little suspect since 1989 was right at the end of a long boom and right before the start of a recession. When calculating % changes over time, the choice of starting and ending points can make a huge difference so it's important to choose your dates impartially (i.e. for economic analysis the start and end points should be at the same point in the economic cycle).

Secondly, I'm not sure it makes sense to use the 3.6% figure. Obviously the people who have a job now but didn't in 1989 have made a huge gain in their after tax income so why should we ignore them when determining if Canadians have made progress in their after-tax income over the last 15 years?

The study argues that more jobs isn't progress because it means less leisure time, but obviously nobody forced any of these extra people to take a job - they had a choice between leisure time and working and they chose to work.

Anyway, the next question is what about the difference between 25.5% growth in GDP/capita and 9.3% growth in after-tax income. Since GDP is a measure of total income for the country, any growth that didn't go to people would have to either go to corporations or to the government³. While the study notes this, it doesn't say anything further about the change in corporate income over this period - which seems pretty odd. Maybe corporations caused some of this gap and maybe they didn't, but if figuring out the source of the gap is the point of your study, wouldn't you want to look into it?

Disregarding the (potential) corporate factor, the study says that the difference is due to increased taxes. Of course, as the study notes, increased taxes won't reduce your standard of living, it just means that some of your income is being spent by the government you elected instead of by you. The tax money spent on the military increases my standard of living by keeping me safe, taxes given to education increase my standard of living by allowing me to get an education, tax money given to health care - well, you get the picture.

As the study points out, most of the tax increases were due to bracket creep (tax brackets not keeping up with inflation) and increased CPP premiums. For some reason, while the study says,

"Up until the mid-1980s, the federal government fully indexed tax brackets, but then opted for a looser interpretation from 1986 to 2000 applying indexation only to the portion of inflation that was above 3 percent,"

they don't explicitly point out that the brackets were fully indexed again in 2000 so this is no longer really an issue.

Also, while the study points out that, "CPP premiums were hiked from 3.6 per cent in 1986 to 9.9 per cent by 2003", they fail to mention that 9.9 was designed to be a long term steady-state rate, with automatic stabilizers built in to keep it from going higher⁴ - so CPP increases should no longer be a problem going forward either.

Then the study pulls out their least convincing line:

"Normally a rise in the tax burden would not automatically be associated with reduced economic well being if it were used to finance more current services or to invest in the future. But this is not the case here. The rise in the tax burden is the price society is now paying for past government deficits and policy shortcomings. Between 1975 and 1996, the consolidated government (federal, provincial and municipal) consistently ran deficits, swelling to as much as 8 per cent of GDP in 1992 and 1993. In that two-decade span, Canadians enjoyed $0.90 to $0.97 in program spending (total spending minus interest on public debt) for every dollar of revenue that was put into government coffers. Not so anymore. Only $0.76 to $0.84 of every dollar goes to program spending, with the rest of the money going towards interest costs and relatively modest payments against the accumulated debt."

[emphasis added on the dates to point out that this problem has been fixed too]

How they decided that paying off your debts and paying the interest on them so as not to declare bankruptcy doesn't contribute to your economic well being I don't know. Personally, I spent the latter half of last year saving money to pay off a debt I owed from my school days. I paid it off over Christmas and I definitely feel that my economic well-being has improved by not owing that money any more. And if there's one thing that I would take as a sign of economic non well-being, it would be declaring bankruptcy cause I didn't make my interest payments.

Still, their point that past (pre-current Liberal) governments screwed us over (albeit they were forced to deal with a severe economic dislocation due to the oil crisis) and that debt repayment should remain a priority is well taken.

After this, the study, assuming it has proved its point switches gears to ask what we can do about this problem. Here's their proposed solution: In order to make more money, Canadians need to earn more money (this is known in economic circles as increasing productivity).

In order to help us earn more money the government should:

1) Spend more money on things like education and infrastructure, which help us earn more.
2) Cut taxes to create more incentives for us to earn more
3) Keep reducing the debt.

Ah yes, spend more⁵, tax less and pay down the debt - why didn't I think of that? - and no, this study was not written by Dalton McGuinty.


By carefully choosing what to emphasize or downplay, the study presents a narrative that high taxes are preventing Canadians from improving our standard of living.

But what it actually tells you if you read between the lines, is that previous governments put us in a hole by creating deficits, underfunding the pension plan and allowing bracket creep. Luckily, the federal Liberal party has solved all of these problems since it took office. Unfortunately, solving these problems involves paying for our past mistakes so we don't feel like we're doing as well as we are because some of our increased income is going towards reducing our debt and refinancing our pension plan.

In conclusion, the study figures that, given that we are now on the right track, it makes sense to continue the balanced Liberal approach of paying down the debt and using the money freed up for a mixture of tax cuts and spending targetted towards productivity improvements.

It's kind of sad that, rather than trying to show Canadians how their financial situation really is improving even if it doesn't seem like it, the article reinforces the inaccurate perception among people that high taxes are keeping them from making any progress.

As a final comment, note that the study never answers the question in their title, "Are Canadians slipping down the Economic Ladder?" - maybe because the authors realize (deep down) that the answer is no (with one exception which I'll mention further down).

OK, enough about the study itself, what about the Post article.

They start off by saying that, "The report urges the federal government to cut taxes and redirect spending toward policies that would boost productivity and incomes."

Of course, you've read the study so you know it is really recommending more spending towards policies that would boost productivity, lower taxes and debt reduction.

Next, the Post ignores the 9.3% average gain/capita and only mentions the 3.6% gain/worker.

With their eye for idiocy, they catch the study's weakest point,

"Canadians have been getting less bang for their taxpayer buck as more of their taxes have been directed toward paying off the national debt rather than funding programs."

I'm not really sure what their point is here - that we shouldn't pay down the debt? That building it up in the first place was a bad idea? That having to pay the interest is annoying?

A little further down, they bring in some new information, namely that,

"A survey of 1,283 Canadians between Dec. 6 and 8 last year found their optimism about the economy was at a 12-year high, but only 23% said their own financial situation was improving.
The survey, by Pollara Inc., showed 34% felt they have been falling behind financially, while 42% felt they have only been holding their own, and their incomes treading water. Coincidentally, the numbers had not changed much over the past 15 years, according to Pollara."

Of course, a relevant thing to mention here would be that, for most Canadians, their income isn't rising as fast as the average income. This is because a disproportionate share of income gains are going to the top 10% of income earners⁶. So a lot of the people surveyed are right that their situation hasn't improved, but it's not because of high taxes, it's because most of the gains from economic growth are being captured by a small segment of the population. Cuts to progressive income taxes would actually make this problem worse - not better. The Post doesn't mention this.

And of course, people are unlikely to factor their improved position with regard to the debt or the CPP into their assessment of their own financial situation (even though it will benefit them down the road).

One surprising thing a little later in the article is when the Post mentions that Don Drummond, one of the study's co-authors, was actually, "assistant and associate deputy minister of finance under Paul Martin", which makes his downplaying (in the study) of what must have been some of his own accomplishments kind of puzzling.

Anyway, the Post then goes on to quote in full just about every word the study has to say relating to how taxes have gone up over the years. Then they quote Drummond as saying,

"I thought there was an implicit contract from government that the tax burden was high because we had to pay for those excesses and they were going to quickly bring down that debt burden," he said. "But... since about 1997, they decided to use a lot of the proceeds from the high tax load to ramp up spending."

It's a nice story, but not a true one⁷. The truth is that the government both allowed taxes to continue rising and drastically reduced spending in order to balance the budget. Once the budget was balanced, there have been both tax cuts (minor tax cuts in 1998 and 1999, a significant tax cut in 2000 and numerous further, smaller tax cuts since then) and increased spending. And when you look into it, the only tax which was increased significantly in the last 10 years is the CPP contributions which have no impact on the deficit/debt at all.

The Post points out that, "Federal program spending has been rising at about 7% annually in recent years, way above the 2% inflation rate". But notice how they don't compare it to what it was in 1989 or the total change since the Liberals took power or give us any growth rates on that figure (I would but I don't know what they are) - pretty low though I'd expect). According to this chart from the federal budget (scroll about halfway down): total government program spending (all levels of government) is now somewhere around 35% of GDP, down from over 40% in 1992.

To give them credit, the Post really does save the best for last, ending their article with a quote from Jack Mintz, who "is professor of taxation at the University of Toronto's Joseph L. Rotman School of Management and president of the C.D. Howe Institute, an economics think-tank", but who isn't connected to the study in any way. According to the Post,

"Mr. Mintz suggested a cut in business investment taxes, the third-highest among the world's 20 major industrialized economies, behind only China and Germany."

Yes, that's the Post's solution to stagnating wages for average Canadians - cut taxes for business. Hard to believe. You have to like how they snuck that in, even in an article which was about a study which didn't mention business taxes once⁸.

So there you have it, some economists wrote a study which demonstrated the wisdom and intelligence of the economic management of the Liberal party in correcting some of the mistakes of the past and which showed how people's income gains were showing up more in the improved financial situation of the government and the CPP rather than in their after-tax income.

Then the study authors twisted their own work to downplay any policy changes undertaken by the current government, to exaggerate their suggestion that high taxes were restraining income growth and to promote the exact same policies being undertaken by the government right now as if they were a recommendation for a change in course.

The National Post skewed things even further by taking out what balance and context the study contained and by throwing in random quotes not connected to the study at all, leaving us with the impression that across the board tax cuts are the only solution to our economic 'stagnation'. Meanwhile, the best course clearly seems to be continuing the balanced approach of spending, debt repayment and tax cuts which the Liberals are already doing.

Times like this always make me wonder how much of this is incompetence / ideological blindness and how much is an ends-justifies-the-means deal where people know what they are saying is misleading and likely to make people support policies which aren't in their own interests, but they do it anyway because they feel it serves some higher ethical purpose (e.g. lower taxes). Either way it's a pretty irresponsible game to be playing, if you ask me.

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¹ For some reason the Post doesn't give the link to the study, even in the online version of the story. I can't imagine someone Blogging a post of that length about a study and not providing a link to it, especially given that the entire study is available online.

² This goes doubletriple for the National Post. In fact you're probably better off not reading the Post at all. So am I of course, but sometimes I feel compelled to either mock them or dispel some of their lies.

³At least I can't think of anywhere else it could go - if I missed something let me know.

⁴See my post on Social Security / CPP here or see this report.

⁵ The authors may argue that they proposed redirecting spending, not increasing it, but since the only thing they proposed in terms of cutting was reducing the growth in spending on health (which is already underfunded, and politically impossible to cut spending on at the moment), I didn't take their spending 'redirecting' rhetoric too seriously.

⁶ From Statscan's daily newsletter, for May 13, 2003,

"Incomes of families in the bottom half of the income distribution showed little or no improvement through the 1990s. However, the 10% of families with the highest incomes experienced substantial gains."

⁷ The Federal Annual Financial Report, while obviously choosing their graphs to suit their message, nonetheless is a pretty good read for figuring out how Federal finances have changed over the last 15 years.

⁸ Not to mention that the Federal government is still phasing in the corporate tax cuts (reduction in tax rate from 28% to 21%) they brought in for the 2000 budget or that they announced a plan in the last budget to phase out the Federal capital tax on business as well.

A good summary (from a pro-government point of view) of changes in taxation since 2000, can be found here.

About 2/3 of the way down they talk about the international context around corporate tax rates. Personally I wouldn't put too much stock in their talk about the U.S. rate of 40% since the U.S. tax code has so many holes, I doubt many American firms pay anywhere near that amount on average, but the rest is pretty good reading.