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Thanks for the link! My thoughts (which are practically identical to yours) here:

http://economics.about.com/b/2009/11/26/can-you-end-child-poverty-by-soaking-the-rich.htm

To the barricades, men. Somebody is eying the riches of the wealthy. As far as the Nordic example goes, you're still ignoring the higher unionization rates and higher incomes in the lower percentiles that are a major factor in reducing the inequality. Without that, corporate tax cuts and higher VATs do nothing.

If unionisation rates mattered, we'd see more equal distributions in countries with higher unionisation rates. We don't.

Evidence that a 6 point increase (from what) will have much effect on labour supply please(besides which how much of such incomes are really a reflection of production and how much is rent). From my point of view you get half a point. The real reason that european are reluctant to tax the very rich, and I think most of their income is indeed rent of one sort or another, is that they can and will move in response.

But my concern with inequality, is not so much with income - it is with wealth inequality. Money makes money, so there is an accelerator there. Tell me how you plan to combat that.

I was a bit disappointed by Ed Broadbent's unquestioning support of child benefits as the unquestioned best way of reducing poverty.

- A typical poor person in this country is a single adult, most likely a single woman. Child benefits miss many poor people. They may not be as cute, but they're just as deserving.
- Child benefits create an incentive to have more kids. It's not a big factor for people who are planning to put their kids in hockey or Suzuki (costs of which eat up child benefits pretty quickly), but this consideration is likely to kick in precisely for people who don't need the added responsibilities in their journey out of poverty
- Child benefits as currently structured create incentives for families to split apart, since benefits are based on household income with the same income test for dual and single parent households.
- and because what's given must be taken away, child benefits raise marginal tax rates in the middle of the distribution.
- and since child benefits are adjusted in June/July based on the previous calendar year's income, they aren't particularly responsive.

The new Working Income Tax Benefit doesn't have a number of these design flaws - there's different thresholds for couples and singles, and it can potentially be paid out in advance.

It might hurt to suggest enriching and expanding a Harper government initiative like the WITB, but it would be a better policy option than increasing child benefits.

A recent example of concerns about rent (or pseudo-rent) earners moving can be found in Spain, which wanted to increase marginal rates on high earners but came under pressure from football (soccer) clubs to reconsider because they thought it would impact their ability to attract top players.

"Money makes money, so there is an accelerator there. Tell me how you plan to combat that."

Why would we want to? Why is wealth a problem? Are we worried about people getting or being rich or are we worried about people (especially kids) being poor? Obviously, we don't want anyone getting rich by extracting rents - and I'll be the first to agree that there's plenty of rent extraction going on - but rich people occasionally *earn* their wealth. That's a Good Thing in my books and I'd like for more people to be able to go start businesses and get rich.


If unionisation rates mattered, we'd see more equal distributions in countries with higher unionisation rates.

Sorry, that should have been "reducing poverty", not inequality. The higher union rates in Nordic countries are a major factor in that.

There's a couple of classic articles by Blau and Kahn e.g. their 1996 JPE piece and their 1992 AER pieces:
http://www.jstor.org/stable/2117457?cookieSet=1
http://www.jstor.org/stable/2138886
that show that centralized wage setting is a major factor in determining the extent of wage inequality. A fairly large literature has since confirmed that
- unions and especially centralized wage setting (e.g. the (old?) Australian model) reduce income inequality/compress the income distribution
- with a more compressed income distribution there's a smaller gender wage gap.

That institutions and particularly the form of wage setting is a factor in the extent of earnings inequality is actually a pretty robust (and when you think about it, not all that surprising) finding.

Okay, that makes sense, but it certainly doesn't jump out of the cross-country comparisons. Unionisation may help, ceterus paribus, but I don't see why a system of transfers should be made conditional on stronger unions.

Patrick,
why am I worried about wealth inequality? Where do you think a lot of the rents come from? Not to mention that wealth = power. Do you really think concentrated power is a good thing?

Plus Patrick,
1. Beyond a certain level of wealth, the "rewards" are practically meaningless
2. Growing individual wealth is a likely waste of resources if we want to maximise social utility. Rich people are not likely to spend very wisely. If like me, you think we underprice resource extraction rents - that may have severe long term consequences.

Simply because without a mechanism to direct the system of transfers where they need to go they'll end up going where they're not needed. In more concrete terms, the lowering of corporate taxes in Canada is not directing more wealth to the lower percentiles but the upper percentile. More unionization would act as that mechanism as it does in the Nordic nations.

Besides which, ultimately if inequality continues to grow, eventually you will have to tax the very rich more in order to continue to support the poor (not to mention essential infrastructure).

Governments don't need unions to tell them which people are poor and who should be receiving transfer payments. They have that information already.

So, why is unionization better than direct transfers to poor people? Seems to me that unionization in this country is all about transfering wealth to the middle and upper-middle class (here's looking at you, public sector unions) while the genuinely poor languish. Unions also seem to have implications for productivity and unemployment/responsiveness to change.

And I agree that increasing the National Child Benefit would tend to encourage poor families to have children. This may or may not be a bad thing, given where our birth rate is. I would tend to lean more toward benefits for all those in poverty, through things like WITB or negative income tax.

The point was raised that increasing either the WITB or National Child Benefit would increase METR for those with low incomes. On the other hand, it's pretty clear to me that the marginal utility of income is highest for those with low incomes, so that even a 50 or 60% METR may not be a very strong disincentive. Any reasonable negative income tax scheme would seem to rely on high marginal tax rates before the break-even point to ensure that the benefit is sufficient for those without employment income while not having the break-even point be too far up the income distribution.

I did not say don't worry about wealth inequality. I did not say don't worry about rents. I am proposing the approach should be to lift the bottom up rather than grind the top down, and to recognize that being rich is no more a moral failing than being poor. I really hate the whole 'economics as morality play' routine. It's stupid. If we accept that some poor people are poor due to circumstances beyond their control, I think we have to admit that some rich people are rich because they really are smarter or worked harder, and thus they ought to keep the fruits of their labour. If incentives matter, and I think they do, then punishing success is not smart.


I have a related paper forthcoming in Canadian Public Policy with Marc Frenette and David Green. We examine the impact of the tax and transfer system on after-tax inequality from 1980 to 2000. Some findings:

- the system was least progressive in 1980.
- it became much more progressive up to 1995.
- from 1995 to 2000, it became less progressive.
- the big drivers were changes in Social Assistance and in high income surtaxes. Much of this was provincial rather than federal decisions.
- increase in market income inequality (ie pre-fisc) was about the same in the 1980s and 1990s.
- in 1980s, system became more progressive and effectively undid the rise in market income inequality
- in the 1990s, the system did not undo the rise in market income inequality--particularly 1995-2000.

" In more concrete terms, the lowering of corporate taxes in Canada is not directing more wealth to the lower percentiles but the upper percentile. "

Are you sure about the incidence of corporate taxes? I'm not sure. I do know that the two biggest investors on Bay St. are the Ontario Teachers' Pension Plan and the CPPIB. Hardly the stuff of top hats and cigars and Daddy Warbucks.

Moreover, if you think that capital flows freely across borders in search of the best returns, then changing corporate taxes has no impact on the after-tax return to capital, as pre-tax returns adjust to compensate for taxes--as they must in order to retain capital if capital would otherwise flee. In that case, incidence of the corporate tax might be on labour.

"and I think most of their income is indeed rent of one sort or another"

This is a myth. Pre WW-II, the very high income folks got most of their income from capital income. This has changed drastically in the last 60 years. Now, the very high income guys get most of their income from earnings. See Figure 3 p. 838 here. In 1946, the top 0.01% of the income distribution got 50% of its income from capital, 30% from earnings, 20% from entrepreneurial. In 2000, it was 25% from capital, 75% from earnings.

The highest income guys are CEOs and executives, not coupon-clipping mint-julep-sipping top-hat wearing stereotypes. If you want to advocate taxing the rich--fine; that's a legitimate position. But don't do it based on 60 year old class mythologies about who the rich are. Taxing capital more heavily will not do a lot to help income inequality and will certainly impact the path of wealth accumulation.

Andrew F - your thinking makes sense if the relevant margin is between market work and leisure. But if the relevant margin is between work in the formal, legal, taxed economy and work in the underground economy? All those home day cares (payment in cash only), BC's #1 cash crop grown hydrophonically throughout the province, and people who combine formal and informal work in various sectors of the economy to maximize their benefits from EI, CCTB etc...

Frances

In fact, I encourage everyone just to go read Saez and Veall 2005 here if you want to learn about the evolution of market income inequality.

Clarification: by 'coupon clipping' I meant coupons of this type by guys like this.

Governments don't need unions to tell them which people are poor and who should be receiving transfer payments.

Isn't the desirable outcome though, to implement private sector solutions whenever possible. Increased unionization takes the government almost completely out of the equation.

Seems to me that unionization in this country is all about transfering wealth to the middle and upper-middle class

Yes, that's why more workers need to be included. I haven't seen any stats on this, but I'd bet that no unionized worker lives in what is considered poverty.

Are you sure about the incidence of corporate taxes? I'm not sure. I do know that the two biggest investors on Bay St. are the Ontario Teachers' Pension Plan and the CPPIB. Hardly the stuff of top hats and cigars and Daddy Warbucks.

They're not the group that need help but are in the comfort zone. The lower percentiles I'm referring to are those living below or just slightly above what is considered the poverty line.

CPPIB does a lot of saving for those in the lower percentiles.

Unions are not a market mechanism in that they are usually just another form of regulation. Labour laws make it very difficult for companies to break labour monopolies.

Yes, that's why more workers need to be included.

Unfortunately, not everyone can work for the government while allowing us to maintain our current standard of living. I think it's also worth considering that unionization is often just a different kind of tyranny for workers. Making more of the economy subject to unionization means more taxation in the form of union dues, and less worker choice. I'm much more inclined to avoid that indirect, circuitous taxation that tends to enrich only the middle class instead of the poor. Why enrich the middle class and hope for it to trickle down (extending unionization is a bit of a pipe-dream and has many negative side-effects) when we could make the taxation more direct, efficient, and use it to help the genuinely poor in a targeted way, rather than enriching already well-off unionized labour.

i don't think the left care about the poor. They just care about being anti american and producing policies that can be sold as such.

jeremy: during the Bush years, I certainly got that feeling too. Bush, in my view, was clearly a terrible president (or more accurately, he surrounded himself with some very nasty people who did some really terrible things), but for the Canadian left to carry on like they did was just silly.

Robert: I find myself quite conflicted about unions. I led a unionization drive once, and the people at the union where very sincere, serious people who really wanted to help. They unfortunately didn't have a clue about business. They couldn't understand that the idea was to try to use the union as a counterbalance to nutty management who where raping the company and shareholders. It was admittedly novel, and might not have done any good, but it seemed worth a try. We were all paid fairly well, and certainly weren't exploited, but we could see that management was making decisions based on their option strike prices (we could predict PR release by the distribution of options expiry dates among the C-levels), not on maximizing share holder value, and we knew that it would ultimately lead to shareholders loosing their shirts and us loosing our jobs. But the union didn't understand that - and to their credit I think they tried. They were much more comfortable talking about seniority (which we had no interest in) or grievance procedures (of minor concern). Anyway, we didn't manage to get certified, they fired (explicitly and constructively) the organizers (including me), and continued with business as usual. In the end it the company DID go bankrupt and everyone did lose their jobs. I washed my hands of the whole mess and moved on.

So, at least for publicly traded companies, I have a dream/dilusion that one day unions will realize they actually have quite a lot in common with shareholders - like a profitable company is the best job security - and that it's non-owner management, and it's screwed-up incentives to manage for the short term, etc. that are the real enemy.

Patrick,
I like that story - now tell that to Kevin Milligan and explain to him that quasi-rent is also rent.

Patrick,
"If incentives matter, and I think they do, then punishing success is not smart."
I think you arguing with a straw man. It all depends on the levels of incentives that you are talking about. We may have differences of degreee, but not of kind.

reason, I don't understand why you're focussing on tangible wealth. It's only a part of total wealth; human capital is much, much more important, and I don't know how you're going to redistribute that. Moreover, much of the inequality in tangible wealth is simply demographic. For retirees, *all* of their wealth is tangible, and for those at the beginning of their careers, *all* of their wealth is human capital.

excellent point Stephen.

reason: quasi-rents? Is that like being a somewhat pregnant?

I think the point I'm trying to make is that the world has changed and labour needs to change too. The rent seekers have become much more sophisticated. It isn't 1850. Just look at the news today: Nortel execs getting massive bonuses on top of very generous salaries while at the same time screwing people out of their pensions. It's like stealing from the guy you murdered while being paid to dismember his corpse!

And labour is surprised by this!? The NDP has to scramble to propose a bill to bump pensioners up the list of creditors? They're shocked, shocked, that management would loot a company. C'mon.

I take a certain amount of amusement in noting that a strict Marxist would find himself siding with the CEO (who is an employee and is therefore classified as a worker) against the pensioners (whose income is entirely based on their holdings of assets and who are therefore classified as capitalists.)

Well, it seems that the CEO's of the world (at least the ones at big public companies and banks) certainly took Marx's advice to heart and united to defeat the evil capitalists.

For some reason Austin Powers comes to mind:

"Finally those capitalist pigs will pay for their crimes, eh? Eh, comrades? Eh?"

"Austin, we won."

"Oh, groovy, smashing. Yay capitalism!"

lol, both comments.

Interesting perspective Patrick. (And a depressing/sad story).

Thank you for educating me for the past couple of years. I often wish you would go one step further. In this case, could you elaborate on current transfers in Canada and suggest improvements ? How do we help ?

Coming from an academia I find your blog polite, sometimes bland and occasionally over my head. People that read blogs, unlike MSM readers, want forceful, unvarnished truth. Sometimes you get there which is great.

When it comes to housing/real estate does anyone have any figures re: Canada on equity and mortgages and newly issued loans broken down by population income segments and population wealth segments ? I am concerned aggregate figures do not provide a good picture. Any CMHC or Big Bank insiders care to educate us ? I have seen it here that CMHC not a concern, and elsewhere that banks no longer lending much to developers. But what about the people ? Debt levels might not be of concern on the aggregate level, but perhaps they are at some income levels particularly with rising unemployment and a jobless recovery being forecast. I am not interested in doom and gloom, just facts and suggestions as to what might happen and what can be done by different stakeholders to avoid a USA type debacle. I think young people in particular are getting frustrated at the lack of jobs, the debt we are incurring and the bailouts of large corporations. At the same time they are stretching their budgets to aquire an asset that might be worth less down the road. CMHC I believe was chartered to help provide affordable housing, but has it done the opposite by facilitating big price increases ? Can we hear from you and other knowledgeable commenters on these issues in a more in depth manner than MSM headlines ?



How about do central banks have a reverse Robin Hood aganeda?

That is they want to give to the rich and take from the lower and middle class in the high wage countries thru exploiting cheap labor?

"Inequality in market income isn't really a problem per se; what really matters is disposable income after taxes and transfers."

Sorry I don't want to depend on who is elected for taxes and transfers.

How about taxing the excess savers to pay down gov't debt and tightening up labor markets by forcing some rich people who won't retire to retire?

"This problem is by now largely solved. As this post documents, applying the Nordic model of taxation to Canada would involve lower corporate taxes (the announced cuts pretty much take us there), ..."

What if lower corporate taxes mean the cash just sits on the balance sheet or goes to upper management pay? What does MSFT do with its cash hoard?

Are some corporations excess savers?

"I take a certain amount of amusement in noting that a strict Marxist would find himself siding with the CEO (who is an employee and is therefore classified as a worker) against the pensioners (whose income is entirely based on their holdings of assets and who are therefore classified as capitalists.)"

Keep amusing yourself but keep in mind neither labour law nor Marxist theory considers CEOs employees. What makes me chuckle is the phrase *strict* Marxist. I wonder if that is a genre of SM.

Stephen Gordon
" For retirees, *all* of their wealth is tangible, and for those at the beginning of their careers, *all* of their wealth is human capital."

Human wealth is volatile (as an IT specialist, I should know). It only counts when it is realised. I'm actually really concerned about the accelerator due to money making money. True in the current world a lot of it is generational. But as inequality increases, inherented wealth becomes more important if tax rates are low. If resources do become short, and population continues to grow, we are going to move to a world where ownership of physical capital will be gaining a larger share of income. It worries me. I think you are looking in the rear visin mirror.

Patrick
quasi-rent http://en.wikipedia.org/wiki/Quasi-rent

Perhaps Stephen,
you might be suggesting that rents from human capital will fall if we concentrate on reducing the advantage the richer have in access to education?

True, but I still get the feeling that CEO compensation packages are not particularly affected by the number of Management school graduates.

And as I said, there is a non-linearity that worries me, as savings rates rise with income and accumulated assets make more income. Just as there is a reverse non-linearity with efficiency of consumption as utility declines for the marginal dollar.

I really don't know what the solution is, but I am just saying, the danger of runaway concentration of income and wealth should not be forgotten in overblown concern about incentives to work. A "new gilded age" is indeed a potential threat.

If you're worried about inter-generational wealth accumulation, estate taxes should take care of that.

As it stands, runaway capital accumulation and the wealthy deriving most of their income from capital has not yet become a problem. Let's cross that bridge when we come to it.

Andrew,
I don't necessarily disagree with you. But I want that made explicit up front.

Great discussion.

It is NOT just the top 1% that have made strong gains.

Among families with children we’ve seen median earned incomes in the top 10% (i.e. the 95th percentile) increase by $44K since 1996, an increase of 31%, compared to an increase of less than $3K for those in the 5th percentile (which was up from $0 in 1996 – they were unemployed) .

You might be interested to know that, to be ranked as a member of the top 10% in Canada, a non-elderly household would be bringing home at least $113K in after-tax income, or $131K in earnings. The top 10% for families with children starts at $122K after-tax, or $146K in earnings.

Saying there are not enough rich people to make a difference in revenues is simply false. Those already best off in our society have done much better than everyone else in the phase of economic expansion we just went through. The last phase of similarly rapid and sustained growth (in the 1960s) delivered much more broad-based prosperity for everyone’s income PLUS enormous investments in public goods. We can’t even keep our rinks and pools open for our kids.

Where should the money come from for the things we all agree should happen, like improving prospects for children living in low-income households?

Frankly, there are a myriad ways of raising more money. The reason that income taxes are the target is because those with deeper pockets can dig a little deeper without noticing as much. Those with the broadest shoulders, economically, can lift more of the weight without struggling as much. That's why it's easy to gravitate to income taxes. But there are other ways of tapping those with greater financial resources. How about wealth taxes? Estate taxes? Financial transaction taxes? Luxury taxes?
Long story short – going forward we’re going to need more money, not less. We need the Stephen Gordons of the world to work with us on that prickly problem, not deny it.

I rather think I have; read through the posts in the 'inequality' category. Canada's Conventional Left doesn't seem to be interested in anything that solid research has actually shown to be effective.

I don't think Stephen is arguing for less government. If anything, he's gone out of his way to demonstrate that the federal government has been shrinking for decades. He's merely arguing for an intelligent tax system, one that can support a robust welfare state without unduly hampering economic activity. He also challenges some of the preconceived notions among those on the left about issues such as consumption taxes and corporate income taxes, and who really pays for them.

Great post. Seems like apparent equity concerns if not outright social envy drives much of contemporary conservative left-wing politics in Canada.

Tried to have some fun with the marketing. How about.... Neo-liberal economic policy analysis at the service of progressive social democracies

---------------------------

A short note on jargon. I like the wiki-pages for learning new definitions or reviewing old definitions. I type w and the term searched in my URL window and up pops the wiki page or a list of wiki pages that are (hopefully) related.

In this case, I thought the definition of quasi-rents was unnecessarily circuitous. Quasi-rents are temporary, simply because the factor of production is in inelastic supply in the short-run but not the long-run.

But overall, wiki is not bad.

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