The Occupy movement, like the ongoing street protests in Quebec, demonstrates that our current efforts at income redistribution have proven unsatisfactory to many Canadians: Although we have improved mobility between income levels in recent decades, the income gap between rich and poor actually has gotten wider.
The face of poverty and income inequality differs from region to region. As the Community Foundations of Canada have highlighted with their work on community “vital signs,” being poor in Toronto is not the same as being poor in Enfield, N.S. The communities have very different local capacities to supplement individual abilities and to respond to specific local needs. Equalization can have a role in addressing this disparity.
John Morgan, mayor of the Cape Breton Regional Municipality (CBRM), has argued that proportional equalization transfers should be sent direct to municipalities. In effect, he wants to equalize cities and towns, not provinces. But critics of this approach rightly highlight that this will simply move the problems created by equalization from one level of government to the next. “Have not” cities would, as have-not 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.
Critics, and I admit I am one, also highlight the risk of a “welfare trap,” whereby communities would become dependent on the transfers, and so don’t risk improving themselves because they will lose more in foregone transfer payments than they gain through economic growth.
American economist (and Nobel laureate) James Buchanan, the father of public choice theory, actually had a different idea: He advocated transfers to individuals, not regions or municipalities. By gradually moving the money into the hands of people, we would force spendthrift provinces to either raise taxes on recipients to “recapture” the lost revenue, or finally constrain their spendthrift ways.
We must recognize, however, that Buchanan advocated transfers in the form of differential federal taxes. The problem here is obvious: If you are poor, and pay little or no federal tax to begin with, then you get little or no benefit.
One alternative to differential federal taxes would be cash transfers to individuals — as opposed to equalization payments to provinces. This would meet the progressive goal of redistribution, and the public-choice concerns about free riders. Simultaneously — and this is why mayors 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.
Such a policy requires no changes to current tax policy, constitutional authority, or even total public spending. And Canada could meet its constitutional obligation to support relatively comparable levels of services at reasonably comparable levels of taxation. Individual Canadians would simply replace provinces as program recipients. We would still cut cheques to each other, and money would still flow from region to region in net terms; but the cash would come to us, instead of going to our provincial capitals.
A program of transfers to individuals would ensure that decisions about what to “tax back” will largely be local in nature, reflecting local costs and the services local taxpayers are willing to shell out for. Transfers to individuals also would serve to avoid federal “strings” on transfer programs, and maximize local tax capacity to fit actual need and desired service levels. You can still build that local stadium, but you will be paying a lot closer attention to the opportunity cost, since it will be paid for with locally collected taxes paid by local voters.
We do not necessarily even have to create new mechanisms to put all this into effect. All provinces, and indeed the federal government, already have existing income-contingent distribution programs into which the equalization funds easily could 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 that could relatively easily be topped up with equalization funding from the rest of Canada. Another slightly more complex option would be to introduce a regionally differentiated Goods and Services Tax (GST) rebate program or to consider a regionally sensitive Working Income Tax Benefit (WITB).
In short, shifting equalization funds from provinces to people would achieve our constitutional commitments and public policy goals, while providing better incentives that encourage local governments to meet local demands in a responsible way. It would also put the brakes on the endless demands for more spending by the provinces.
Juanita Spencer is the Manager of Operations and Research at the Atlantic Institute for Market Studies