Crawl Across the Ocean

Wednesday, April 26, 2006

This and That

I've written lots about child care but if I had to boil it down to what's relevant at the moment, it's that there are two flaws with what the Conservatives are proposing.

The first is that their proposal is not means-tested, and in fact will provide less support to poor dual income families (those who need help the most with child care) than it will to many wealthier families - especially those which can afford to have one parent stay home.

From today's Globe:
"The [Caledon] institute has calculated that the families who will benefit most from the child-care allowance, after taxes and clawbacks, are those making $200,000 a year or more with one parent at home. They will keep $1,076 of the $1,200 annually.

Families with two working parents and a combined income of $30,000, by contrast, will keep just $199 annually of the new payments."

The big gap is due to the family allowance subsidy being taxable in the hands of the lower income earner. The fact that it is taxable at all means that lower income families lose much of the benefit in reductions to other means tested benefits (this is why the Liberals consolidated all the different benefits into one). And the fact that it is taxable in the hands of the lower income earner means that it favours families where one person can afford to stay home (those which contain one person with a reasonably high income, one presumes).

There is an easy solution to this problem which is to increase the Child Tax Benefit (as proposed by the NDP) rather than giving $1,200 in taxable income to every family.

The second problem is that much of the money disbursed by the program will not actually be spent on child care, making it inefficient. This problem is mitigated somewhat by the desire to treat all families equally and the practical difficulties in ensuring that money given to a family which doesn't pay for child care is used for child care, but it is still a serious program weakness, nonetheless.

There is lots more to say, but that is the basics at the moment.

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This article by Terry Glavin on the damage being done to B.C.'s forests and aboriginal communities by the pine beetle and by global warming, is interesting.

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Are you kidding me? Further proof that so-called serious publications need some sort of statistical style guide to go along with writing style guides. This story somehow feels it is useful to tell us how much the price of some things have gone up since 1961 - without adjusting for inflation, and it also contains lots more attempts to deceive rather than inform.

If the Fraser Institute wants to try and gets its way by creating false impressions with statistical games, that is their right, but I don't see why the Globe and Mail would facilitate it.

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The CEO Post has yet another big front page story keeping us up to date with what CEO's want. Personally, I fail to see how it is news that CEO's want taxes cut (although I like their use of the word 'must'), any more than it is news that the sun rose in the East this morning. A key part of the word 'news' is 'new' I always figured.

I thought this paragraph was particularly wtf?,
"They recommend that federal departments identify savings each year equivalent to 5% of their operating budgets, much as households regularly do to deal with unexpected costs."


Aren't you glad you weren't raised in a CEO household? I'm sorry son, you can only attend 19 of your soccer team's 20 games this year because we are cutting 5% out of our operating budget to deal with unexpected costs. Just tell your teammates that you are, uh, sick that week.

Personally I would be fine with cutting corporate taxes - if we simultaneously increased the marginal rate for the highest tax bracket to make up the lost income.

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John Ibbitson has his best column in a while and is right on the money in today's globe (subscription only)

After discussing how the Conservatives' desire to pile tax cuts/rebates on top of the Liberals pre-election tax cuts and spending announcements puts the surplus in jeopardy, Ibbitson concludes:
"But we are in dangerous waters. There are people in high school now who have never been through a recession. Kids, you have no idea what one is like. Factories shut down, people are laid off, tax revenues dry up, even as demand for welfare and other economic assistance skyrockets.

Governments go into deficit, increasing the interest payment on the debt, which causes the bond rating services to lower credit worthiness, which means even higher interest on the debt, leading to even higher deficits. It's called a vicious circle, and it's hell.

That is why, at a time when current finances are sound but long-term demographic projections are worrisome, a prudent finance minister would hold spending increases to inflation plus population growth, while throwing every available dollar at the debt, even if it requires a bit of political chicanery.

But the Liberals gradually gave up on fiscal discipline, and the Tories don't seem the least interested in returning to it."


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Finally, via the blogging of the president, this article (pdf file) by two economists is somewhat slanted, but is nonetheless a good antidote to all the bleating by the armchair experts on the French economy who figured that France was doomed because it didn't introduce a new law to make it easier to fire young people.

As it turns out, there is little net difference between youth unemployment in France and in the United States.

11 Comments:

  • On the Fraser Institute spinoramalamalamadingdong.....

    Michael Smyth swallowed it hook, line and sinker on his radio show this evening.

    Point is....these people don't care if only the dumbed-down media run with it, because that's all they need to crank up the whirlitzer.

    Heckfire, I'm sure Mr. Walker would be ecstatic even if only ET Canada picked-it up and took it straight.

    At least in the first cycle.

    .

    By Blogger Gazetteer, at 12:26 AM  

  • With regards to the Ibbitson column, people can always access it via the Google News trick.

    By Anonymous Jo, at 6:47 AM  

  • "The second problem is that much of the money disbursed by the program will not actually be spent on child care, making it inefficient."

    So, if the hypothetical low dual-income family that is intended to benefit from the daycare spaces "created" by the Liberal / NDP policy have current needs that trump those of their children (leaky roof, beer & popcorn, whatever) I suppose that makes the daycare program "inefficient" since it is not responding to the priorities of the citizens involved; it would allocate resources to provide a service that they value less than other alternative services that they could have obtained with those same resources.

    I think the fundamental point of difference here, Declan, is whether you think families are entitled to set their own priorites, or should accept the priorities mandated by some sort of majority (or plurality) vote. In some areas the economies of scale are so great, or the free-rider problem is so pervasive, that as a society we accept that we should determine communal priorites and act on them: I am not convinced that either of these factors enters into the child-care field.

    "Further proof that so-called serious publications need some sort of statistical style guide..."

    Yes - I heard that on the news as I drove in this morning, and my first thought was "is that in real or nominal terms?" That being said, inflation should factor out equally - a 1600% increase in taxes (say - I can't remember the figures used) is greater than a 1000% increase in shelter or an 850% increase in food costs, whether we adjust for inflation or not. Comparing relative increases is remains valid, although I think inflation-adjustment leads to a more meaningful comparison, albeit not without problems of its own with over 45 years of basket composition and index-chaining issues to deal with.

    By Blogger deaner, at 9:53 AM  

  • Deaner,

    If you do the calculations, you'll find that the "average" family takes home 64% of gross income after taxes in 2005, and took home 66% of gross income in 1961. Yes, that's a big increase, indeed, especially in light of the fact that, in 1961, medicare had not been established. The figures are absolutely meaningless unless inflation is taken into account, and obviously it hasn't been. Indeed, these statistics not only ignore the fact that oil is significantly more expensive now than in the 1960s, but ignore that people most likely have more expensive tastes in food, clothing, and shelter in real terms today, especially for the so-called "average" family, which apparently takes in almost 100k per year.

    By Blogger Josh Gould, at 11:23 AM  

  • "If you do the calculations, you'll find that the "average" family takes home 64% of gross income after taxes in 2005, and took home 66% of gross income in 1961."

    Ummm... No.

    1961: Gross = 7,582, Tax = 1,675: tax rate = 22.09%
    2005: Gross + 95,531, Tax = 28,467: tax rate = 29.80%

    That's an increase of 7.7 percentage points in the rate of tax, or just about a 35% increase in the rate that tax is removed from our incomes (if I wanted to sensationalize it). If you prefer to look at things in the sense of "how much am I allowed to keep" then it has decreased from 77.91% of income to 70.2% - obviously an equal reduction in percentage points or a reduction of just under 10% in the amount of our income not redirected to the government.

    "The figures are absolutely meaningless unless inflation is taken into account, and obviously it hasn't been."

    Sorry, wrong again. When dealing with relative spending (or income) patterns real or nominal measurement is equally useful.

    "...especially in light of the fact that, in 1961, medicare had not been established..."

    You might have observed that in the constant-dollar tax calculation the burden has increased from $11,406 in 1961 to 28,467 in 2005 (Fraser Institute, p 40 - figures in 2005$) - an increase of just under 150%. Consider all the things that governments were doing in the late 50s and early 60s: building the St Lawrence Seaway and the Trans-Canada Highway, expanding schools at a prodigious rate to meet the demands of the oncoming baby boom, building dams and powerplants to supply energy to those boomers, building streets and roads and highways for them to move around on, funding the military at a much higher level than at present... you really think it takes more than that much again to provide medicare? Medicare was well established by 1969 with a per family tax burden of a mere $16,963 (real) - what has changed since then?

    "...but ignore that people most likely have more expensive tastes in food, clothing, and shelter in real terms today..."

    People don't have real and nominal "tastes," Josh - but if what you are trying to say is that people have "better stuff" now than they did in the early 60s, I would caution that qualitative comparisons are very difficult - that's part of the basket re-normalization and index chaining issue I was alluding to.

    By Blogger deaner, at 1:22 PM  

  • Well, I was going by the CTV article which stated:

    In 1961, the average income per household was $7,582 before taxes, and $5,000 after taxes, and an average family spent $2,824 on food, shelter and clothing per year.

    In fact, now that I look at it again,

    In 1961, the average household earned $5,000 and paid $1,675, or 33.5 per cent, of that in taxes. The average family in 1961 spent $2,824 on food, shelter and clothing per year.

    What? So much for media convergence - even the Globe and CTV can't agree on the figures. Not only that, but

    In 2005, the report found, the average family earns $60,903, and spends $28,467 of that, 46.7 per cent, on taxes. The average family now spends $22,167 on food, shelter and clothing per year.

    So the "average family" has lost about $35,000 a year.

    Sorry, wrong again. When dealing with relative spending (or income) patterns real or nominal measurement is equally useful.

    Not at all. Are you saying that taxes have increased 1000% or more, even though they haven't? The CTV headline says: "Report finds taxes up 1,600 per cent since 1961". Taxes have not jumped by 16 times in real terms.

    You might have observed that in the constant-dollar tax calculation the burden has increased from $11,406 in 1961 to 28,467 in 2005 (Fraser Institute, p 40 - figures in 2005$) - an increase of just under 150%.

    Yes, I'm looking at the figures now. It's quite odd that they do not report the increases in the percentage of taxes paid. All they report is the increase in the absolute amount, with no mention of increases in real income over that 44 year period.

    That's a problem. I won't deny that bracket creep has caused some increases in real income taxes, but not to that degree. If total taxes had increased by 150%, the relative rate would imply an increase from 22% to 55%, not 29%. The Fraser Institute further does not reveal how the inflation-adjusted taxes were calculated.

    On top of all this, these figures are calculated for some fictional average family in 2005, for which property, profit, and indirect taxes are counted as income (p. 34-5). Why? Are "average" families really paying $2,520 per year in "profits taxes"? Similarly, they consider resource royalties paid to governments as "taxes on natural resources", even though said taxes are not paid by individuals, and the province that benefits most from them also has no sales tax, and the lowest level of income tax (well, not for some people, actually).

    Similarly, mark-ups in provincial liquor stores are considered taxes (p. 14), even though mark-ups are ubiquitous in retail, and, in any case, in Quebec and Alberta, liquor is sold privately extensively (and hasn't seemed to be noticeably cheaper, at least in Quebec).

    So, to sum up, this is a fairly typical Fraser Institute "study", full of half-truths, distortions, and a unique way of defining the world which just happens to support their political agenda.

    By Blogger Josh Gould, at 2:45 PM  

  • "In 2005, the report found, the average family earns $60,903, and spends $28,467 of that, 46.7 per cent, on taxes. The average family now spends $22,167 on food, shelter and clothing per year.

    So the "average family" has lost about $35,000 a year."


    The phrasing (and reading comprehension of the writer) are sorely lacking - when they say the average family had an income of $61K they mean income after taxes. If you are re-making Declan's point that the media cannot be trusted with numbers, I am in agreement.

    "'Report finds taxes up 1,600 per cent since 1961'. Taxes have not jumped by 16 times in real terms."

    Just because you confuse real and nominal doesn't mean that every one does - even though I would not like to rely on the numeracy of newspaper writers. The statement that taxes have increased by 1600% is absolutely accurate - the writer does not claim that this is an increase in real terms. As I said (and will say again) when comparing relative changes in income or consumption, it doesn't matter whether you use real or nominal measure, since in any event you are not concentrating on the increase, but on the increase (or decrease) relative to other increases. When comparing absolute changes then you do need to inflation-adjust, and even when speaking of relative changes inflation adjustment may be helpful, since 'current dollars' have more meaning for a current audience.

    "The Fraser Institute further does not reveal how the inflation-adjusted taxes were calculated."

    Other than the footnote at the bottom of the page that identifies the source as: Statistics Canada, Consumer Price Index, catalogue 62-001-XPB? By the lack of further explanation I would assume all the nominal dollar amounts were simply deflated by the relative index - anything else would require some detail.

    "Are "average" families really paying $2,520 per year in "profits taxes"?"

    Re-read the report, Josh - there is a good explanation of why individuals are "paying" corporate taxes (see p 75 and following). The short version is that taxation can only represent a shift in consumption, so only those who consume ("people who eat and drink" is the usual phrasing) can pay taxes. Corporations don't 'consume' in their own right, so they don't pay taxes; they simply aggregate cash flows and pass them on (sometimes to other corporations) until they reach a consumer.

    The classic micro-economics question is "who bears a tax on production?" - the answer is that it will be borne in part by the consumer and in part by the owner of the capital assets used to produce the commodity in question, with the proportion determined by the relative elasticities of supply and demand for the goods (if labour is not mobile, it may be borne in part by the workers who make the goods as well...). Since ultimately the consumer and the capital provider (and the workers) are households, the tax is ultimately paid by families somewhere as a reduction in their economic well-being.

    The FI study uses micro and macroeconomic models, including the Social Policy Simulation Database and Model (SPSD/M) from Statistics Canada and their own Canadian Tax Simulator to estimate the actual incidence of such indirect taxes. The "average family" does not 'pay' the corporate taxes (or earn the corporate profits) shown - but their economic welfare is reduced or increased by them, and that is what the study is trying to aggregate. Obviously, not all families get equal benefit from corporate income, or pay the same amount in (imputed) corporate taxes - the FI report goes into some detail on the allocation of those items by family income decile.

    "Similarly, they consider resource royalties paid to governments as "taxes on natural resources", even though said taxes are not paid by individuals..."

    It is often asserted that natural resources like standing timber or mineral deposits are 'owned by the people.' If so, then the sale of those assets to corporations should lead to a payment to "the people" - when an owner sells something, he expects to be paid. Instead, that money is paid to the government, who is presumably acting as a trustee or agent of "the people." When the government takes money that belongs to "the people" and spends it, we call that "taxation" (since 'theft' was already taken).

    "Similarly, mark-ups in provincial liquor stores are considered taxes (p. 14), even though mark-ups are ubiquitous in retail..."

    Yes - and when they occur in retail they are considered as part of the "corporate income" earned by households to the extent they are providers of capital to the retail sector. Note that this role as providers of capital also includes cpaital provided by way of the market component of the CPP as well as direct investment and indirect investment by way of private pension plans.

    "So, to sum up, this is a fairly typical Fraser Institute "study", full of half-truths, distortions, and a unique way of defining the world..."

    I disagree. The study was resonably well presented (I cannot comment on the econometric modelling - no doubt the FI was at least somewhat constrained by the prospect of scrutiny by those who can) and took pains to lay out their assumptions and the underlying structure of taxation. The explanations were deliberately pitched at a level where interested non-economists could understand them (if they made the effort to read them). I don't think there were any "half truths" - you seem to have a preference for describing taxation in terms relative to total income, while the authors of the report describe it in abslute terms, but the equivalent information is included in the report, and this seems to be a preference in presentation style, not a distortion.

    "...which just happens to support their political agenda.

    Hmmm... I would say that this is at least as true of your reaction to it, and probably moreso.

    By Blogger deaner, at 4:50 PM  

  • grr. I wrote a huge comment, but it seems to have disappeared into the ether.

    Gaz - Agreed.

    Jo - true. I don't see it there yet, but it should show up at some point.

    Dean (1st comment) wrote:

    "So, if the hypothetical low dual-income family that is intended to benefit from the daycare spaces "created" by the Liberal / NDP policy have current needs that trump those of their children (leaky roof, beer & popcorn, whatever) I suppose that makes the daycare program "inefficient" since it is not responding to the priorities of the citizens involved; it would allocate resources to provide a service that they value less than other alternative services that they could have obtained with those same resources."

    This is true but this is an inefficiency of priorities, and is a bit of a moot point since every federal party has made child care spending a priority. I'm talking about inefficient policy.

    As for the economic justification for childcare spending, I imagine it is mainly positive externalities (me and the economy both benefit from other people's kids getting good child care) along with information assymettry (because parents can't tell exactly how much better one child care might be than another, the market doesn't provide enough high quality care this is similar to the argument about why the market for used cars is dysfunctional)).

    On top of this one might argue that if we are committed to an economic form of organization which is bound to produce low incomes for those who are 'less competitive', because we think that economic system provides the best overall benefits, than equity suggests we have a duty to help those who get the short endo f the stick - which might include helping them with child care expenses.

    As for the Fraser Institute, I was deliberately trying to avoid the kind of in-depth debate you and Josh are having by just focussing on the inane use of nominal numbers to make the total increase look bigger.

    As for comparisons, comparing taxes to food (for example) is misleading for many reasons.

    One is that while the amount of food consumed per person is relatively steady, taxation can expand to include new things (such as health care, interest on the debt and cpp, for example).

    Another is that you would expect people to spend a smaller percentage of their income on necessities as they get richer, while the same is not true of taxes.

    Another is that the last few decades have since smaller increases in the price of hard goods due to greater productivity increases in that sector and outsourcing of production to places with lots of desperate workers. Many government expenses (e.g. teachers) are less open to either productivity increases or outsourcing.

    It's kind of too bad because if you look at the report itself, there is lots of interesting information there. It would just be nice to have someone analyze the Canadian tax situation in this detail who doesn't have an axe to grind. For example, someone who could find room in a 132 page document entitled 'Tax Facts' to print a chart showing how the tax burden has decreased since 2000 (maybe I missed it?).

    I also found it funny how on page 35-36 they basically admit that there tax day calculation is way off, but they do it anyway because it is easier for people to understand the inaccurate (overstated) figures.

    By Blogger Declan, at 6:45 PM  

  • For example, someone who could find room in a 132 page document entitled 'Tax Facts' to print a chart showing how the tax burden has decreased since 2000

    Try:
    Table 4.3 (p 40) real-dollar family tax burden;
    Table 4.6 (p 46) allocation of family income.

    Sorry - no charts, just tables.

    The reduction in tax burden is less dramatic than you might think!

    By Blogger deaner, at 9:43 PM  

  • Yeah, I saw the tables - thanks :)

    I didn't really think it was down all that much. It's just that 'Taxes down slightly since 2000' makes a very different headline than 'Taxes up 1600% since 1961', that's all.

    By Blogger Declan, at 10:28 PM  

  • Okay - I thought you were looking for one of those 1600% headline figures! Maybe if we switch from CAD to USD to calculate the amounts involved...

    By Blogger deaner, at 9:04 AM  

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