Income inequality and redistribution have become popular subjects in both public and policy circles in the wake of concerns over apparent concentration of wealth. However, a reasonable discussion of this subject is often hampered by a lack of a clear conceptual framework and relevant facts.! First, income inequality is a relative concept that can only be measured relatively by statistical tools like the Gini coefficient; used alone, these do not provide context for the results. Second, there is no single agreed-upon goal for income redistribution; different approaches invariably involve value judgments based on ethical or political theories that can differ widely on the crucial questions of why and how much redistribution should be sought. Third, the importance of this issue requires that measurements of the scale and absolute amount of existing income redistribution be utilized to inform the discussion. This communiqué takes a sober look at facts relating to income inequality and redistribution in Canada and applies methodology to reveal that, while the scale of income redistribution has declined since 1994, growth in real income since then has done much to compensate in maintaining! levels of absolute income redistribution that are high by historical standards.
Income inequality and redistribution have become popular subjects in both public and policy circles in the wake of concerns over apparent concentration of wealth. However, a reasonable discussion of this subject is often hampered by a lack of a clear conceptual framework and relevant facts.! First, income inequality is a relative concept that can only be measured relatively by statistical tools like the Gini coefficient; used alone, these do not provide context for the results. Second, there is no single agreed-upon goal for income redistribution; different approaches invariably involve value judgments based on ethical or political theories that can differ widely on the crucial questions of why and how much redistribution should be sought. Third, the importance of this issue requires that measurements of the scale and absolute amount of existing income redistribution be utilized to inform the discussion. This communiqué takes a sober look at facts relating to income inequality and redistribution in Canada and applies methodology to reveal that, while the scale of income redistribution has declined since 1994, growth in real income since then has done much to compensate in maintaining! levels of absolute income redistribution that are high by historical standards.
The U.S. is beset by weak economic growth, ballooning debt and stubbornly high unemployment but the collapse of the housing bubble that spurred the 2008-2009 global financial crisis was more a consequence than a cause of what is wrong. The real culprit was and remains poor policymaking in the areas of taxation, finance and economics, which helped bring on the crisis by encouraging Americans to engage in counterproductive behaviour. This paper warns that without meaningful fiscal reform, the U.S. risks joining the PIIGS — Portugal, Ireland, Italy, Greece and Spain — on the road to ruin through unsustainable debt, high spending and chronically low growth. The author acknowledges the heated partisan debate over whether the answer is higher taxes or lower spending and explains that neither course alone offers a practical way out. A balanced approach incorporating aspects of both, combined with detailed policy reform as set forth in this paper, is the best solution. U.S. politicians must put aside their differences and replace bad policies with sound ones or the American economy will face disaster.
The U.S. is beset by weak economic growth, ballooning debt and stubbornly high unemployment but the collapse of the housing bubble that spurred the 2008-2009 global financial crisis was more a consequence than a cause of what is wrong. The real culprit was and remains poor policymaking in the areas of taxation, finance and economics, which helped bring on the crisis by encouraging Americans to engage in counterproductive behaviour. This paper warns that without meaningful fiscal reform, the U.S. risks joining the PIIGS — Portugal, Ireland, Italy, Greece and Spain — on the road to ruin through unsustainable debt, high spending and chronically low growth. The author acknowledges the heated partisan debate over whether the answer is higher taxes or lower spending and explains that neither course alone offers a practical way out. A balanced approach incorporating aspects of both, combined with detailed policy reform as set forth in this paper, is the best solution. U.S. politicians must put aside their differences and replace bad policies with sound ones or the American economy will face disaster.
There are both theoretical and practical tax policy considerations that favour a broad recognition for the value of corporate income tax losses-- including for businesses operated within corporate groups. Ideally, an equitable and economically efficient tax system could obviate the need for loss netting against income by providing for the tax value of losses from business to be refundable by tax authorities in cash to owners. This approach, however, involves many serious difficulties, including revenue cost to governments and potential for abuse by both domestic and foreign businesses. Accordingly, loss refundability tends to be provided for only sparingly, if at all; while many corporate income tax systems—such as in the U.S. the U.K., Japan and many other OECD countries--deal with loss netting within corporate groups through a formal system of tax loss transfer or tax consolidation.While Canadian policymakers have considered introduction of such a system over a long period of time, they have yet to come up with a satisfactory formal system for Canada. So, corporate groups in Canada have been left to make do with an informal self-help loss trading system that presents a number of problems compared to formal systems.As a federal country with substantial corporate taxation levied at the provincial level, Canada appears unusually constrained in what it can do to bring greater equity and efficiency to corporate group tax loss utilization. Moreover, the inefficiencies in the current system are small in aggregate terms, and the informal self-help system has a relatively generous threshold for access. Accordingly, while Canada's current informal self-help corporate group loss system is far from ideal, it appears to remain as a workable approach. Alternatives to the status quo should be considered cautiously, as they have the potential to do more harm than good.
There are both theoretical and practical tax policy considerations that favour a broad recognition for the value of corporate income tax losses-- including for businesses operated within corporate groups. Ideally, an equitable and economically efficient tax system could obviate the need for loss netting against income by providing for the tax value of losses from business to be refundable by tax authorities in cash to owners. This approach, however, involves many serious difficulties, including revenue cost to governments and potential for abuse by both domestic and foreign businesses. Accordingly, loss refundability tends to be provided for only sparingly, if at all; while many corporate income tax systems—such as in the U.S. the U.K., Japan and many other OECD countries--deal with loss netting within corporate groups through a formal system of tax loss transfer or tax consolidation.While Canadian policymakers have considered introduction of such a system over a long period of time, they have yet to come up with a satisfactory formal system for Canada. So, corporate groups in Canada have been left to make do with an informal self-help loss trading system that presents a number of problems compared to formal systems.As a federal country with substantial corporate taxation levied at the provincial level, Canada appears unusually constrained in what it can do to bring greater equity and efficiency to corporate group tax loss utilization. Moreover, the inefficiencies in the current system are small in aggregate terms, and the informal self-help system has a relatively generous threshold for access. Accordingly, while Canada's current informal self-help corporate group loss system is far from ideal, it appears to remain as a workable approach. Alternatives to the status quo should be considered cautiously, as they have the potential to do more harm than good.
From provision of OAS, GIS and CPP to the favourable taxation of Registered Pension Plans and RRSPs , Canada's government has long focused policy efforts on better ensuring that working Canadians approach retirement with sufficient income supports in place. If the government wants to continue to move in this direction by trying to help maximize returns to pension plan members, while decreasing the portfolio risks faced by those pension plans, one step it could consider would be: Expanding the exemption for withholding taxes on foreign dividends and interest earned by pension plans. The exemptions for foreign interest and dividends are already available to U.S. investments, part of a reciprocal arrangement spelled out in the Canada-U.S. Tax Convention. Those exemptions allow U.S. and Canadian pension funds to participate in cross-border investments that would otherwise be too costly. Pension funds rely on international investments to optimize diversification and returns. And tax conventions between countries are typically designed to protect investors from the participating countries from being double taxed by both their resident country and the foreign jurisdiction where they invest. This good policy has certainly been Canada's model in its numerous bilateral tax treaties. But while the U.S.-Canada Tax Convention extends the benefit of tax exemption to dividends and interest earned from cross-border investments by tax-exempt pension funds, when it comes to all other countries, there is no equivalent result. Yet, aspects of these same exemptions exist in certain bilateral treaties between other countries in treaties with one another. That certainly suggests that there are other trading partners, besides just the U.S., that are open to the possibility of these particular exemptions. If Canada could negotiate broadening these exemptions to countries beyond the United States, it would realize important advantages with little cost. By not moving further in this direction for non-U.S. foreign interest and dividend income of Canadian pension funds, these funds are left with lower benefits or higher contribution rates for pension plan members. It is also inevitably distorting the investment decisions being made by pension fund managers, producing a negative impact on risk-adjusted returns to their portfolios. While Canada may lose some revenue by forsaking some withholding tax, that would almost certainly be outweighed by the total economic gains as pension returns increase and, in reciprocal arrangements, Canada becomes more welcoming to foreign capital. With a number of countries already evidently open to the idea of tax exemptions for foreign interest and dividends earned by pension funds, and the economic effects for doing so overwhelmingly positive, the Canadian government should seriously consider getting started on negotiating reciprocal arrangements for cross-border pension fund investment with other countries.
From provision of OAS, GIS and CPP to the favourable taxation of Registered Pension Plans and RRSPs , Canada's government has long focused policy efforts on better ensuring that working Canadians approach retirement with sufficient income supports in place. If the government wants to continue to move in this direction by trying to help maximize returns to pension plan members, while decreasing the portfolio risks faced by those pension plans, one step it could consider would be: Expanding the exemption for withholding taxes on foreign dividends and interest earned by pension plans. The exemptions for foreign interest and dividends are already available to U.S. investments, part of a reciprocal arrangement spelled out in the Canada-U.S. Tax Convention. Those exemptions allow U.S. and Canadian pension funds to participate in cross-border investments that would otherwise be too costly. Pension funds rely on international investments to optimize diversification and returns. And tax conventions between countries are typically designed to protect investors from the participating countries from being double taxed by both their resident country and the foreign jurisdiction where they invest. This good policy has certainly been Canada's model in its numerous bilateral tax treaties. But while the U.S.-Canada Tax Convention extends the benefit of tax exemption to dividends and interest earned from cross-border investments by tax-exempt pension funds, when it comes to all other countries, there is no equivalent result. Yet, aspects of these same exemptions exist in certain bilateral treaties between other countries in treaties with one another. That certainly suggests that there are other trading partners, besides just the U.S., that are open to the possibility of these particular exemptions. If Canada could negotiate broadening these exemptions to countries beyond the United States, it would realize important advantages with little cost. By not moving further in this direction for non-U.S. foreign interest and dividend income of Canadian pension funds, these funds are left with lower benefits or higher contribution rates for pension plan members. It is also inevitably distorting the investment decisions being made by pension fund managers, producing a negative impact on risk-adjusted returns to their portfolios. While Canada may lose some revenue by forsaking some withholding tax, that would almost certainly be outweighed by the total economic gains as pension returns increase and, in reciprocal arrangements, Canada becomes more welcoming to foreign capital. With a number of countries already evidently open to the idea of tax exemptions for foreign interest and dividends earned by pension funds, and the economic effects for doing so overwhelmingly positive, the Canadian government should seriously consider getting started on negotiating reciprocal arrangements for cross-border pension fund investment with other countries.
