The “unintended” negative effects of Canada’s approach to equalization are well known: more public servants, higher public wages, richer public pensions, deeper public debt, steeper taxes, and higher per-capita levels of public services; and all of this in the receiving provinces. As a politician or public servant in any of those receiving provinces, why would you want to get off this gravy train? As a federal politician “bringing home this bacon” why would you want to stop?
Which is why “unintended” is in quotations in the first line. Do we really believe that with several other models of fiscal equalization available, our political leaders picked “cheques to provinces” out of a hat? Without discussing (or at least being aware of) the foreseeable impacts of big, no-strings- attached cheques, and the organized interests they could pay off with other people’s money?
If we want to reverse the harm that equalization as we know it is doing to our country, and increasingly more and more of us want to do just that, then we need to give people a reason to change. We need to find something more powerful than the entrenched self-interest of federal and provincial politicians and public servants. Trusting to their sense of fairness or their moral responsibility to reverse known harm has had little effect. Pitting provinces against each other seems to have done nothing but make the program richer and the problems deeper (each “solution” has seen the provinces that got the least the last time get more this time).
Perhaps a different protagonist, or two, is needed. There are two groups ready willing and able to step into this fray: individual Canadians and municipalities.
John Morgan, mayor of Cape Breton Regional Municipality (CBRM), has argued for proportional equalization transfers direct to municipalities. In effect he wants to equalize cities and towns, not provinces. Critics of this approach rightly highlight that this will simply move the problems created by equalization from one level of government to the next. In Morgan’s world, cities would, as provinces currently do, buy more things and pay higher prices than they otherwise could afford. Higher wages, bigger pensions, larger staffs, bigger buildings (and more of them), a spending spree matched only by that which receiving provinces have indulged in since equalization was first introduced.
Critics, and I admit I am one, also highlight the risk of a ‘welfare trap’, where communities would become dependent on the transfer and so don’t risk improving themselves because they will lose more in losing the transfer than they gain through economic growth (at least in the critical short and medium term).
Nobel Laureate James Buchanan, the father of equalization, actually had a different idea – transfers to individuals, not provinces or municipalities. This largely avoids, or at least significantly reduces, the free rider syndrome and the risk of a welfare trap at the provincial or local level. By gradually moving the money into the hands of people, we would force spend thrift provinces to either raise taxes on recipients to “recapture” the lost revenue, or finally constrain their spendthrift ways.
In this transition to people not provinces, we would engage the greatest accountability tool; broad based personal self interest, in an effort to at long last overcome the driving force behind big government spending: the organized special interest. And those interests take many and varied forms: big unions, big business or other issue-specific interests (boutique tax cuts anyone?).
First though, we must recognize that Buchanan advocated transfers in the form of differential federal taxes. The problems here of course are obvious, if you pay little or no federal tax to begin with, then you get little or no benefit. Meanwhile, if you simply make the tax refundable at low or no income, you create a disincentive to work and earn (two critical long term solutions for distressed economies everywhere).
One alternative to differential federal taxes is income contingent cash transfers to individuals in place of provinces. This would meet the progressive goal of redistribution and the public choice concerns about free riders. Simultaneously – and this is why big and little city mayors and wardens should get on board – it would improve the tax base for local governments and enhance their ability to deliver services. This would further enrich the quality of life in smaller communities and enable them to offer amenities that may help to attract the next generation of residents. No more ghost towns or rural retirement homes.
If nothing else, the occupy movement has got us all talking about the fact that our current efforts at redistribution have not achieved our desired goal of bringing everyone in society to a reasonable level of prosperity. Although we have improved mobility between income levels, we have actually widened the income gap. That said, as the Community Foundations of Canada have highlighted with their work on community ‘vital signs’, being poor in Toronto, Ontario is not the same as being poor in Enfield, Nova Scotia. The communities have very different local capacities to supplement individual abilities and to respond to specific local needs. Moving equalization down to the level of the individual would be a real opportunity for local government to play a larger role in pursuing that desirable national goal of “reasonably comparable levels of service at reasonably comparable levels of taxation”.
The Occupy movement has also heightened the already considerable political pressure to address the inequities in our society. In this context, pressure for increased individual transfers are more likely to succeed than pressure for increased direct transfers to other governments and the evidence for that is readily available: provincially, individual credits and direct cash transfers have significantly increased in the last number of years, a similar trend is seen on the federal level, transfers to municipalities on the other hand have not grown at the same or indeed anywhere near that pace.
Such a change in where the money goes would also be an indirect boon for local governments. They would become the key public delivery mechanism for national equalization – and would fund many of those services through traditional local tax tools. Shifting equalization funds from provinces to people achieves our constitutional commitments while offering many interesting opportunities to improve equity in society and assist local governments in meeting local needs (as opposed to using other people’s money to satisfy our wants). It would also put the brakes on the endless demands for more spending by any number of groups who are very adept at convincing a few people to part with our money, but would find it infinitely harder to convince us collectively to do the same.
Such a policy requires no changes to current tax policy, constitutional authority, or even total public spending. Canada could meet its constitutional obligation of ‘making equalization payments’ to support relatively comparable levels of services at reasonably comparable levels of taxation. Individual Canadians would simply replace provinces as the recipients of this effort to keep Canadians reasonably equal. We would still cut cheques to each other, but they would come to us, instead of going to our provincial capitals (where they get fought over by people with more influence than you and me).
Transfers to individuals allows maximum effective re-distribution (based on federal and provincial ability to pay) as the decisions about what to “tax-back” will largely be local in nature reflecting local costs and the services local tax payers are willing to shell out for. Transfers to individuals also avoids federal ‘strings’ on transfer programs and maximizes local tax capacity to fit actual need and desired service levels. No more one size fits all models funded by taxation of other people.
You build what you can afford, but what you can afford has actually expanded. To get the new local stadium you have to hand over the money that came in the mail last week. You may still do it, but you will be paying a lot closer attention to what you give up, and just how unavoidable those cost overruns really were. (It is worth noting here that similar opportunities exist in relation to funding health and education to adjust the balance of power, but this discussion focuses only on the equalization transfer.)
The case for individual transfers as opposed to transfers to other governments has been well made in both theory and practice. Politically, transfers to individuals continue to be a popular and regular tool of both provincial and federal governments. Such transfers will likely increase in frequency in response to the occupy movement and the growing evidence of income disparity. This is especially true given the evidence that the tax system has proven to be both a theoretical and practical failure in addressing this gap.
Few argue that government should not attempt to reduce known income inequalities. Tax policy alone, however, seems capable only of dragging the top income earners ‘down’ and has largely proven ineffective at drawing the bottom ‘up’. Replacing transfers or ‘subsidies’ to provinces with transfers to low income individuals is very much in line with the income based solutions that we know work, as opposed to the taxed based efforts that we know do not.
We do not necessarily even have to create new means to spread this money around. All provinces and indeed the federal government already have existing income contingent distribution programs into which the equalization funds could easily be redirected. From a funding point of view the province of Nova Scotia, for example, already has an affordable living tax credit and a poverty reduction tax credit which could relatively easily be enhanced through targeting equalization funding there, instead of into general revenues.
It would be slightly more complex, but not overwhelmingly so, to instead introduce a regionally differentiated Goods and Services Tax (GST) rebate program or to consider a regionally sensitive Working Income Tax Benefit (WITB). A WITB being just one tool we might consider to avoid trapping people in place of provinces into dependence on the federal dime. After all, the last thing we want to do is to trap people, in place of provinces, in a perpetual state of dependence.
Juanita Spencer is author of “Putting Our Money Where Our Mouths Are”, a recent paper published by the Atlantic Institute For Market Studies, an independent social and economic think tank based in Atlantic Canada.