Worthwhile Canadian Initiative

Inequality and debt: the soft bigotry of low expectations

"The poor don't have enough income to save, and can't help going into debt to the rich. Debt is caused by inequality".

That statement is wrong on many levels. It's wrong theoretically. It's wrong empirically. But most of all, it's wrong because it might make inequality worse. It's the soft bigotry of low expectations. Providence is especially important to the poor. Saying that the poor can't help but be improvident is the last thing they need to hear.

(This post will piss some people off. "Nick's blaming the poor; of course they can't help either their poverty or their lack of saving!")

The generosity collapse

People give when they're asked. 

Jim Andreoni and Justin Rao have  proved it. They ran the following experiment: one person, the allocator, was given 100 'money units', worth $10 in real money. She was free to choose how much to keep for herself and how much to give to another person, the recipient. The recipient, however, had an opportunity to ask for a particular division of money - 50/50, say, or 30/70 or 60/40.

It turns out that people who ask for more get more - up to a point. When the recipient asks for, say, 70 percent of the money in the envelope, the allocator is quite likely to say "sorry" and give nothing. But a recipient who asks for a 50/50 split on average receives more than the recipient who asks for nothing.

Are the rich capitalist? Are capitalists rich?

A short answer to both of these questions is "typically not," and an even shorter answer is "no". A longer answer is below the fold.

The Basic Income: Go big, or go home

I used to blog fairly regularly about the Basic Income (aka Citizen's Income, aka Guaranteed Annual Income), but the passage of a decent interval of time, Kevin Milligan's recent Economy Lab columns ([1] , [2]) and Erin Anderssen's long article in Saturday's Globe and Mail gives me an excuse to revisit the issue and perhaps repeat myself. I had almost finished writing this before I saw Kevin's most recent column, so there's some overlap that I can't be bothered to edit out at this point.

More evidence on minimum wages, employment and poverty

A year ago, I brought attention to a Canadian Public Policy article on poverty and the minimum wage in Ontario. A notable finding of the study was that the overlap between those who earn minimum wage and those who are in poverty was surprisingly small, small enough to conclude - as I did - that "increasing the minimum wage is only slightly more effective as an anti-poverty measure as would be distributing money at random across households." A few months later, I came across a study that found much the same results in the United States.

I knew that policy analysts in the Quebec government were working on a similar project and had heard that they had found similar results. That study has finally been made public, and is one of a set of articles on the minimum wage. Even better, it would seem that Pierre Fortin has fleshed out and put into digital form the literature survey I blogged about over here (has it really been four years?!?).

But it's this article by Jean-François Mercier and Martine Poulin that has the numbers I'm going to talk about below. A very nice feature of the study is that it pays particular attention to those earning just above minimum wage.

Gender equity and vertical equity

I'm spending today writing a review of Caren Grown and Imraan Valodia's new book Taxation and Gender Equity.The review is for the journal Feminist Economics, but I'll give you an uncensored sneak preview of the good bits here.

Is there any point in saving?

A recent report prepared for the Department of Finance by Keith Horner came to a optimistic conclusion about Canadians' savings levels:

Overall, it appears that about 69% of Canadian households saved in RPPs and RRSPs at rates sufficient to fully maintain their consumption levels in retirement (100% replacement rate). About 78% of households met a lower target consistent with a 10% reduction in consumption at retirement (90% replacement rate).

I read this and was stunned - if you'd asked me to guess the percentage of households that were saving enough for retirement, I would have given a number half the size of Horner's estimates, or less.

Philanthropy and the public good

I'm just back from visiting the Getty Villa and I don't know what to make of it.

On the one hand, this is a model of what can be achieved through private philanthropy. J. Paul Getty built the villa to house his collection of Greek and Roman antiquities. The building, grounds, and setting are gorgeous, the antiquities truly impressive, the staff friendly and helpful and - best of all - due to Getty's generosity, admission is free.

Should recent immigrants be eligible for Old Age Security?

Most Canadian seniors are guaranteed an income above the poverty line by Old Age Security, Guaranteed Income Supplement and the Canada Pension Plan. Seniors are less likely to be poor than children or adults under 65 - with one exception. Mike Veall has found that 71 percent of recent immigrants aged 66 and older have incomes below the poverty line. Although recent immigrants were just 2 percent of the 66 and over age group, they constituted 20 percent of those in poverty (2004 numbers based on tax return data).

"How the ultra-rich get even richer"

That's the title of my latest column on high-income concentration at Canadian Business.

Notwithstanding the title, the article's main point is that we don't know how it's happening.

The anglosphere and high-income concentration

Anthony Atkinson and Andrew Leigh have a working paper on the strikingly similar patterns in high-end income concentration in five English-speaking countries.

An update on the concentration of income in Canada

Yesterday saw an odd coincidence:

• The Globe and Mail ran a bunch of articles about the 10-figure salaries earned by a small number of people ([1],[2],[3]).
• McMaster University's Mike Veall passed along updated data (preliminary paper and data files [1], [2], [3]) confirming the trend in which income is increasingly concentrated among a small number of people.

Three years ago, I blogged about the results that Mike published with Berkeley's Emmanuel Saez on the evolution of top income shares in Canada up to 2000. The updated numbers are not directly comparable to the ones in the AER study, but they show the same trends over the periods in which the two data sets overlap. Even better, they show what has happened to the concentration of after-tax income.

Lloyd George and Avatar

I haven't seen Avatar. That's good. It means I can take a clearer look at the underlying policy problem.

The policy problem in Avatar is that some blue people own all of some valuable natural resource, and won't let anybody else have any.

Lloyd George, as UK Chancellor of the Exchequer, addressed the same policy problem in his 1909 "People's Budget". The British aristocracy owned the land, just as the blue people owned the valuable natural resource in Avatar. I don't know if the blue people in Avatar used it for hunting foxes; probably they had peculiar customs of their own.

Celebrating pointlessness: minimum wage edition

The minimum wage in Ontario went up today, and Jim Stanford thinks that it's cause for celebration. I'm not sure why. I'm guessing that he - as does the editorial board of the Toronto Star - believes that a higher minimum wage will help reduce poverty.

Sadly, this belief is mistaken. As I noted earlier when discussing this study, recent research using data from Ontario finds that the intersection between those in poverty and those who earn low wages is remarkably small:

From that previous post:

Even under the assumption that there are no employment effects, "only 10.66 percent of total wage increases accrue to workers belonging to poor households." Given that 10.3% of households are in poverty, increasing the minimum wage is only slightly more effective as an anti-poverty measure as would be distributing money at random across households.

Not really cause for celebration, is it? I've said it before, and I'll say it again: if you want to help people in poverty, give them money.

Even more on the ineffectiveness of minimum wages as an anti-poverty measure

As was the case in Ontario, recent evidence from the US illustrates the pointlessness of using the minimum wage as a way to reduce poverty (h/t Craig Newmark):

Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor? Using data drawn from the March Current Population Survey, we find that state and federal minimum wage increases between 2003 and 2007 had no effect on state poverty rates. When we then simulate the effects of a proposed federal minimum wage increase from $7.25 to $9.50 per hour, we find that such an increase will be even more poorly targeted to the working poor than was the last federal increase from $5.15 to $7.25 per hour. Assuming no negative employment effects, only 11.3% of workers who will gain live in poor households, compared to 15.8% from the last increase. When we allow for negative employment effects, we find that the working poor face a disproportionate share of the job losses. Our results suggest that raising the federal minimum wage continues to be an inadequate way to help the working poor.

I understand that an internal study done for the Quebec government has found the same thing. I'll blog on it if and when it becomes public.

If you want an effective anti-poverty measure, give money to poor people. It really is that simple.

Taxing the rich is harder than you think, part 2

A few weeks ago, I wrote this on the effectiveness of introducing a tax surcharge on high income earners as a way to reduce income inequality:

[We] have to look at the incidence of the increased tax on high earners. The burden of the tax does not necessarily fall on the people who actually pay the tax.

We can be pretty sure that if there's one group of people who won't be paying the tax, it is the high-income earners themselves...

[T]he gross incomes of high-income earners will rise so that their after-tax incomes are the same. Extra revenues will be generated, but the burden of the tax increase will be borne by those below the top end of the income distribution...

The tax system is at best a clumsy instrument for redistributing income, and there are simply too many possibilities for generating unintended perverse outcomes.

Soon after, the UK government announced a tax of 50% on bank bonuses. And today, we have this (h/t MR):

Bankers escape bonus blow: City bankers will suffer little or no impact from the bonus supertax imposed by the government last month, according to a Financial Times poll of leading investment banks.

Most banks, polled in an anonymised survey, said they would absorb all or part of the cost of the one-off 50 per cent tax by inflating their bonus pools, even at the risk of irritating the government and their own shareholders.

The results chime with intelligence garnered by headhunters. “The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

So just who will end up paying that surtax?

Why would unions oppose a basic income?

The Berkeley Electronic Press has a new journal: Basic Income Studies. The Basic Income - also known as the Guaranteed Annual Income (GAI) in Canada - is a proposal that I'm very much favourably disposed to, even though I'm not familiar with all of the technical details. I took a look at its inaugural issue, and I'm glad I did.

One article struck me in particular: Yannick Vanderborght's "Why trade unions oppose basic income". Why would unions - who often take pride in their  commitment to progressive goals - object to a basic income policy?

Optimal Tax Theorist bleg; can 100% marginal tax rates ever make sense?

This is a bleg. I'm looking for someone who: understands optimal tax theory better than me (shouldn't be too hard); can explain it simply (may be harder).

Here's the question: can it ever be part of an optimal tax system to have 100% marginal tax rates on some part of the income distribution?

Taxing the rich is harder than you think

In this post on Ed Broadbent's suggestion for a 6 ppt increase in the income tax rates faced by people earning $250k or more, I mentioned that some serious econometric work had to be done before this could be treated as a meaningful proposal. It soon occurred to me that there very likely had been some work done on this topic, and that I should try to track down some of the literature. It turns out that prospects of using the tax system to counter the trend towards higher concentration of incomes at the top end of the income distribution are limited, and the chances of generating perverse outcomes are large.

Revisiting Robin Hood's agenda: Be less concerned about taking from the rich and focus on giving to the poor

Ed Broadbent had an op-ed in Tuesday's Globe on a plan to reduce child poverty, and he offers this proposal:

In the next budget, let's impose a six-point increase in income tax on those earning more than $250,000 a year (whose average taxable income is $600,000). While leaving them with very high incomes, this would provide $3.7-billion in additional revenue. All of this should be used to increase the National Child Benefit Supplement and thus help our poorest children. With this single act, we would significantly make up for two decades of neglect and make a major dent in child poverty.

I'm happy to endorse the $3.7b increase to the National Child Benefit Supplement - the costs are small (less than 2% of federal spending), and the gains are huge. But for reasons I'll explain shortly, the tax proposal is not particularly persuasive.

In his article, Broadbent asks

Why is it that Finland, Sweden and Denmark have almost wiped out child poverty, and we have not?

Below the fold, I'll try to provide a partial answer to that question. And I'll explain why the conventional Canadian Left's preoccupation with using the tax system as a way of dealing with inequality and poverty should be rethought.