Feature Article:                                                                                             Some Tax-Time Tidbits--or Are They Toad Bits?

Isabella Horry and Michael Walker

Well, it's the time of year again when we all engage in that most excruciating of activities--calculating our annual income tax bill. At the danger of inserting a hot probe into the jangle of nerve ends which have been exposed by this process, we thought it might be interesting to explore some of the features of the personal income tax system in Canada for your amusement. Well, okay, perhaps amusement isn't exactly the right word. Perhaps diversion would be more appropriate.

We know you were thinking misery, and on the old adage that misery loves company it may interest you to know that the tax filing ritual in which you will engage will also be shared by, at latest count, 19,437,069 other individuals who will also file a tax return. Altogether, you and the other 19 plus million taxpayers will contribute some $100 billion worth of personal income taxes to the federal and provincial governments. The federal government expects contributions amounting to $60 billion while, if they follow their past behaviour (we don't have all of the provincial budgetary wish lists yet), the provincial governments are going to extract another $40 billion. On average, you and your fellow sufferers are going to contribute about $5,150 per head to federal and provincial coffers in the form of personal income taxes.

There is a wonderful array of interesting detail hidden in these average calculations. For example, 27 percent of all tax filers had an income of $10,000 or less. That is, of course, a reflection of the fact that many people who file income tax returns are young people who work sporadically during the year as they attend university or college and also because of the increasing interest displayed by Canadians in part-time work. While we have all heard a lot about this, it is interesting to find that the largest single block of tax filers are in fact in this zero to $10,000 range. No other $10,000 increment of income contains as many tax filers. This largest block of income earners earned about 5 percent of total income earned in the economy and paid only 0.31 percent of the total tax bill. An amazing 52.5 percent--more than half of all tax returns--were filed by individuals with incomes of less than $20,000. This very large group earned 19.6 percent of the income declared, yet paid only 6.2 percent of the tax paid to the federal and provincial governments.

The smallest block of income tax payers was the group which earned $250,000 or more. They constituted only a fifth of a percent of all tax returns filed, or 37,310 returns, earned 3.78 percent of all of the income declared, but paid 7.32 percent of the total tax bill. The average tax rate in this highest income group was 33 percent. That is, not withstanding all of the hoop-la about wealthy Canadians not paying tax, the highest income group is paying 33 cents of every dollar they earn. Of course, at the margin they are paying up to 60 cents on the dollar. By contrast, the lowest income group, representing 52 percent of returns, paid an average tax rate of only 5.4 percent.

Nothing preoccupies people in the discussion of incomes and taxes like the great divisions in society--the middle class, the rich, and of course, the poor. While a study of the underlying facts relating to the tax system warns us that any such simple characterizations are likely to be incorrect--the poor, for example, are often students whose families are affluent but who, from an income tax point of view, are classed with the lowest income earners because they file as individuals. Aside from these difficulties, and not forgetting that they exist, if we divide all income tax filers according to their income into those who earned the bottom 30 percent of all income, the top 30 percent and the middle 40 percent, we find some very interesting things.

For example, the bottom 30 percent consists of anybody whose income was $26,352 or less, while the upper 30 percent, surprisingly, consisted of anybody whose income was $53,400 or more. In between $26,352 and $53,400 is what is often referred to as the great middle class, accounting for 40 percent of the total income earned in the country and 41.3 percent of the total tax bill paid. It is important to note that this middle class group, which many would be inclined to think of as the largest group, contains only 27.3 percent of the total number of tax filers. The largest group of tax filers, at 63.7 percent, were in the bottom thirty percent of the income distribution, and as for that wealthy top 30 percent of total income, it was earned by 9 percent of total tax filers.

It is important in considering these numbers to remember that we are talking here about individuals. If the analysis were done for families there would be a very different story since many of the low income earners shown here would be in families--i.e. husbands with wives, and children with parents--with much higher total incomes.

Perhaps the most noticeable fact about the distribution of income and taxes in Canada, as revealed by this analysis of actual income tax returns, is that the top 30 percent of income earners paid 45 percent of the total tax bill. When we compare this to the bottom third's 13.7 percent of the total tax bill it becomes pretty clear that Canada's tax system is indeed progressive and does extract larger amounts of tax from higher income groups. The possibility of extracting even more from these higher income groups is explored in another article in Fraser Forum by The Fraser Institute's Director of Finance and Administration, Victor Waese.

By comparing tax returns in the most recent year available, 1992, with those back in the middle of the 1970s we can get a real sense of what's been happening to the structure of employment in Canada. There have been some significant developments. For example, whereas in 1976 55.96 percent of all income was earned by people who were business employees, by 1992 only 43.33 percent of income was earned by business employees. While a knee jerk reaction may be "ah, just as I suspected--a big increase in the amount of government employment," the facts, however, are somewhat different. Most of the reduction in business employment reflects the fact that increasingly Canadians are choosing not to work for a business but rather to work for themselves in offering a service or in some other activity.

One of the most significant increases in the "occupation" category over the period since 1976 has been in the number of people who are pensioners. They moved from 7.78 percent of total filers in 1976 to 14.75 percent in 1992. An even greater jump was experienced in the group which is termed "unclassified" by Revenue Canada. In 1976, 5.29 percent of all income tax returns were filed by people who were unclassified, or presumably unclassifiable by Revenue Canada, whereas by 1992 that number had jumped to 14.81 percent. This and the general movement toward self-employment may also imply that the amount of tax which is collected at source by the federal government is declining.

Self-employed individuals must report their income and pay their tax individually, except to the extent that even though they are self-employed, they may offer services to others in such a way as to be taxable at the source of their income. Whereas 81.4 percent of all income was declared by employees in 1976, this had fallen to 69.96 percent by 1992. It is perhaps not surprising that over this period there also has been an increasing amount of activity generated in what is often referred to as the underground economy and an increasing suspicion by many people that there is a consider-able amount of tax "avoision" associated with this change in the structure of employment.

Further support for this idea is that since 1976 there has been a drop in the amount of personal income declared on tax returns. Whereas in 1976 total income declared on tax returns was 80.5 percent of the total income Statistics Canada measured in the economy, by 1992 this had dropped to 78.9 percent. Such a development is consistent with the notion that as independent employment becomes more prevalent, there is less compliance with the requirements of the income tax system.

Another interesting tidbit is that farmers, who comprised 2.21 percent of all tax filers in 1976, declined to only 1.21 percent by 1992, which underlines the fact that farming is a declining source of employment as mechanization and concentration in the industry sustain yields with fewer and fewer employees.

On the other end of the scale, there has been almost no change in the percentage of total returns filed by lawyers, for example. They file a tiny 0.12 percent of all returns, while accountants presently represent only 0.08 percent of all filers. However, looking at the group of professionals as a whole, including architects, doctors, accountants, dentists, artists and entertainers, there was a move to 1.08 percent of total filers in 1992, up from 0.8 percent of total filers in 1976.

While we realize that you have been preoccupied with income taxation at this time of year, it is important as a final note on the subject to remind you that income taxes are far from being the whole story for the average family when it comes to the total tax bill. In fact, in 1994 the average Canadian family, that is to say, families of two or more individuals, paid some $11,037 in federal and provincial personal income taxes but this amounted to only 40.6 percent of their total tax bill. Next in line as a tax bill for the average family was the combined GST and PST of $4,135. In total, the family, which earned $57,696, paid $27,203 in total taxes to the three levels of government.

There now, doesn't that make you feel better?

Feature Article:                                                                                 Controlling Public Debt:                                                              Are U.S.-Style Debt Limits the Answer?

Robin Richardson

Uncontrolled debt in 1995 federal budget

The February 27, 1995 federal budget does nothing to stop Canada's huge national debt from growing even larger in coming years. In fact, this year's $546.1 billion federal debt is projected to rise to $603.1 billion by March 31, 1997. This $57 billion rise comes despite the tax increases and alleged spending cutbacks announced in the budget.

An additional measure of the seriousness of the federal government debt problem is that public debt charges are expected to increase from $38 billion in 1993-94 to $50.7 billion in 1996-97--an increase of $12.7 billion or about 33 percent in just three years. The "interest bite" (percentage of public debt charges to total revenues collected by the government) rises from just under 33 cents of each dollar the federal government collects in revenues to 37 cents in 1996-97.

The seriousness of Ottawa's debt management challenge is further highlighted in table 1 which compares direct debt interest costs as a percentage of total revenues among the provinces and the federal government on a public accounts basis. By this measure of debt affordability, the interest bite on the government of Canada is more than double that of the provincial average, and five times that of British Columbia.

The need for debt controls

As Canadian federal and provincial governments grapple with their massive debts, it would be wise to consider approaches to debt management policy that are working in other jurisdictions. The experience of some U.S. states is particularly relevant.

Until now, the operative goal of Canadian government debt management policy has been "more debt is better as long as credit ratings are maintained." For some, the "more debt is better" philosophy has continued even when credit ratings were lowered. Little if any regard has been given to debt affordability.

Now that debt servicing costs are taking an increasingly large bite out of government revenues, some governments appear willing to consider limits on the further growth of public debt. British Columbia, for example, will introduce a debt limitation plan in this spring's budget. It is timely, therefore, to review the debt management experience of the U.S. states.

Debt management practices in the U.S. states

A central feature of debt management policies of the U.S. states is debt affordability. In determining affordability, table 2 shows that some states have firm limits on debt levels set in state law or in the state constitution, while others set more flexible targets. Some states have strict requirements for projects to qualify for debt financing. In funding capital projects through debt financing, the debt service expense becomes a fixed cost in the operating budget and, if excessive, can limit future options.


Some implications for British Columbia

Debt policy should be made inclusive of the total of provincial government debt whether it originates in the operating account deficit or in borrowing for capital projects. British Columbia should adopt a well-formulated capital planning process. It should be multi-year and provide for some mechanism to establish priorities to determine which projects to fund. In addition, a good debt policy should provide a link between debt decisions and the operating budget. For example, a decision to build a school or prison should be linked with decisions about operating costs to staff and operate the facilities.

Debt limits

About two-thirds of the U.S. states have limits on the amount of debt service or authorized debt that the government can incur. Canadian taxpayers should insist that their governments adopt these type of limitations. The first policy is to limit debt service to some percentage of available revenues. Most U.S. states that have a policy which limits debt service charges to 5 percent of general fund revenues, although some allow a higher limit.

As shown in table 1, the only Canadian province that comes close to the U.S. standard of 5 percent at the present time is British Columbia. The direct debt "interest bite" for Canadian provinces ranged from a low of 5.2 percent for British Columbia as of March 31, 1994, to a high of 18.6 percent for Nova Scotia.

Each province should assess its own situation and adopt a debt management plan to bring its debt service costs over a period of time to no more than 5 percent of total government revenues. This, of course, would have to be accompanied by a debt reduction plan as discussed below. British Columbia could achieve this goal immediately by capping the growth in its public debt. For other provinces, this goal would take longer to achieve. Nevertheless, the setting of a debt affordability goal and the adoption of a plan to achieve it is much needed if Canada and its provinces are to work their way out of the current debt problem without a financial crisis of major proportions.

The second policy worth considering in Canada is to limit authorized debt to either a fixed amount or to some economic or financial indicator. Table 2 shows that debt limits in the U.S. states range from no allowable debt to a dollar amount such as $500,000 or a percentage of income or revenues. Far more states have debt limits than have policies to limit debt service, although many have both.

Because of the already excessively high levels of government debt, it would be prudent for Canadian governments to adopt procedures to reduce the level of their public debt. Limits to further growth as have been adopted by most U.S. states would be counterproductive because they would in effect validate existing debt levels in the minds of the public.

Canadian governments would be wise to adopt a debt reduction plan similar to Alberta's Balanced Budget and Debt Retirement Act which sets out a 25 year plan to retire the province's net debt.

Once the debt reduction goal has been achieved, Canadian governments might then consider limiting the further growth of their public debt to an economic or financial indicator as in the U.S. state examples (ie., personal income, assessed value of taxable property or general revenues) or by voter approval.

The government sector as a whole

When establishing a debt limit and/or debt reduction target it is important to define government debt as broadly as possible to include "the government sector as a whole" [See Robin Richardson, `Understanding All-Government Debt,' in "Inside Canada's Government Debt Problem and the Way Out," Fraser Forum Critical Issues Bulletin, The Fraser Institute, Vancouver, B.C., May 1994, chapter 1, pp. 8-13.] for the jurisdiction under consideration. Using British Columbia as an example, table 3 shows that a comprehensive measure of B.C.'s debt was $43.6 billion as of March 31, 1994, not $26.0 billion as emphasized in government documents. This 68 percent difference is accounted for by (1) other liabilities reported on the province's and crown corpora-tions' balance sheets, (2) other future potential costs of the province such as unfunded pension liabilities, pending litigation and commitments of government enterprises, and (3) the debt of other entities not presently included in the reporting entity but recommended to be included by the Auditor General of British Columbia, such as advanced educational institutions, hospitals, and school districts.

A comparison of the two most recently audited reporting periods emphasizes the importance of basing the debt limit and/or debt reduction target on the most comprehensive measure of provincial debt. Total provincial debt including guaranteed debt (line 7) increased $2,658 million between 1993 and 1994, whereas the increase was $5,246 million, or 97 percent greater, based on the "government sector as a whole" measure of total debt, other liabilities, and other future potential costs (line 29).

A final comment is in order. Even the debt figure of $43.6 billion for the British Columbia provincial government sector as a whole as of March 31, 1994 understates the size of B.C.'s debt problem. Some of the unknown items in table 3 such as aboriginal land claims (line 19(b)) and undetermined environmental cleanup costs (line 19(c)) are potentially very large numbers.

Conclusion

In general, the U.S. states that actively and successfully manage their debts seem to look at 1) debt service as a proportion of revenues, 2) debt outstanding per capita, and 3) debt outstanding as a proportion of personal income as measures of debt affordability and capacity. On all of these measures, Canadian governments are far more indebted than their American counterparts.

The Alberta model for eliminating a large portion of its debt over the next 25 years is worth considering by other Canadian governments. Once debt levels have been reduced, legislated limits on debt service and debt limits as adopted by many of the U.S. states are also worth considering to further contain government debt to a manageable and affordable level.

Taxing the Rich and the Corporations as a                      Solution to Governments' Deficits

Victor Waese

The debate that led up to Paul Martin's "break-the-back-of-the-deficit" budget, and no doubt will continue on well into the future, is centred on the question of whether the deficit reduction program should be addressed by cuts in spending or increases in taxes.

The Fraser Institute has always argued on the side of cutting government spending. While many are coming around to this point of view, there is still a significant constituency in the country who believe that the government should maintain its current level of services. In their view, the issue of the deficit should be dealt with by increased taxes on corporations and "the rich."

One question never addressed by those who say we should erase the deficit by increasing taxes, is whether it is possible to do so. In fact it is not.

In the Institute's recently released Tax Facts 9, a calculation is shown that demonstrates that if in 1991 the government had taxed away all income earned by individual taxpayers in excess of $60,000, "...total tax revenue in 1991 would have been $13 billion higher than it actually was." [Horry, Isabella D., Filip Palda, and Michael Walker, Tax Facts 9, The Fraser Institute, 1994, p. 76.] What would the effect have been on government deficits had this tax on "the rich" been in effect? In the 1991-92 fiscal year, the total of federal and provincial government deficits amounted to $53.5 billion. Given the magnitude of these deficits, it is simple mathematics to conclude that after confiscating everyone's income over $60,000, governments would have still been in a deficit position of about $40 billion.

How much of this $40 billion could have been covered by increasing taxes on corporate profits? Looking at corporate profit-after-taxes for just 1991 is not too helpful in making this determination, since in 1991 all Canadian non-government business enterprises suffered an after-tax loss totalling some $1.3 billion. However, take their average annual after-tax profits over the 12 year period extending from 1982 to 1993, which were $25.4 billion [Statistics Canada, Quarterly Financial Statistics for Enterprises, Catalogue No. 61-008.] per annum, and ask the same question. Confiscating these profits would still have left governments in the hole to the tune of about $14 billion.


I challenge anyone who thinks that our governments' deficits can be dealt with by raising taxes to estimate the tax revenues that would be generated by an economy where there is no possibility of earning more than $60,000 a year, and companies have no opportunity of earning a profit on their invested capital.

There are simply not enough rich people and not enough corporate profits to tax to deal with the deficits from which we are suffering. The burden of the solution must be based on a dramatic cut in spending.

The Loneliness of the Long-distance Fiscal Conservative

Owen Lippert

For 20 years, The Fraser Institute has been a proverbial "voice in the wilderness." Michael Walker has repeatedly drawn attention to Ottawa's problem of deficit spending and the growing debt. Liberal and Conservative governments alike did not take to heart the message--spend less, tax less, spend wiser, and tax fairer. Is it time to come in from the cold?

Is Paul Martin the first Finance Minister to listen and to act to the call for fiscal responsibility? If you read most newspapers or listened to most broadcasts, you would say "yes, in spades."

On Budget Day, February 27, 1995, I went to the "lockup" in Ottawa's Congress Centre. With me in the cavernous main hall--that had the air-conditioning on in the middle of a snow storm-- were 500 journalists and another 200 "experts." Paul Martin could have paid for his new shoes by autographing copies of the budget. Few appeared interested in the "predictable" Fraser Institute position that "this is not a tough budget."

But in fact, this budget is not an effective response to Canada's fiscal problems.

Despite the budget's 78 percent approval rating by the public, despite the bond traders' accolades, and despite some real, if limited, cuts to the civil service, Paul Martin has, yet, to do what a responsible Finance Minister should. In this budget, for instance:

•overall spending increases by $600 million

•the deficit forecast only drops to $32.7 billion at a time when the Canadian economy is growing at 4.5% and

•corporate taxes increase for no reason other than to "hit" business in order to soften up the public for some mild spending cuts.

Sure, the budget promises some worthy actions. Foremost, it promises block funding. This will allow Ottawa next year to control and reduce its $30 billion in health, education, and welfare transfer payments to the provinces.

But--and it's a big but--Martin's budget fails to produce a plan to reach a balanced budget. It does not address seriously $42 billion in transfer payments to individuals. It squeezes government operations; it does not change what government does--despite all of Premier Bob Rae's end-of-social-Canada, teary-eyed accusations.

If the true test of the 1995/96 budget is not media praise, but what actually happens to spending, then Paul Martin's grade is a "D+".

Okay, Martin did better than his predecessors. Brian Mulroney used to say he gave out less patronage than Trudeau. Mulroney was right, but that was not the standard by which the public judged his actions. The standard Martin now faces is how can he reform the federal finances to keep Canada from "hitting the wall."

In this budget, Martin squandered the opportunity to turn the direction of Canada's finances away from the wall. He may regret that he did not act more decisively and cut deeper and change more. A sudden interest rate jump, a Moody's downgrade of Canadian bonds, or uncertainty resulting from a Quebec referendum on sovereignty could throw his modest deficit target out the window.

If interest rates in 1995 did what they did in 1994, then Martin would have to add $6 billion to the 1995/96 deficit. That could mean Ottawa's finances had not improved one iota from the previous year's. Remember, too, Paul Martin was able to reduce the 1995/96 deficit by spending the proceeds of a revenue surge. He also shifted $2.6 billion in adjustment costs back into the 1994/95 deficit while bringing forward the $5 billion in anticipated savings into the 1995/96 books. It is not unlikely that the 1995/96 deficit could actually go higher than the 1994/95 deficit.

That is unacceptable. Martin knows it. The financial community at home and abroad knows it. If the 1995/96 deficit goes off target, Martin may have to present a second budget for this year. In the second version, he will have no choice but to do what he did not do in his first.

One cannot help but wish Paul Martin well. One wants to believe he does seek a balanced budget. One can admit he faces tough and substantial political pressures. Yet, if he had done the right thing, he would have found the pressures no greater, but the rewards higher. If you are going to be blamed or given credit for spending cuts, you might as well do them.

After all, the wilderness is not all that bad if you know why you are there. And, surely, the wilderness is better than the wall.

April Questions and Answers

Isabella Horry

Q: How does a federal deficit-to-GDP ratio of 3 percent compare with ratios throughout Canadian history?


A: Between the fiscal years 1926/27 and 1995/96, the deficit-to-GDP ratio has ranged from 0.10 percent to 22.65 percent. Surpluses were also run during this period varying from 0.14 percent to 5.44 percent of GDP.

This month's graphs illustrate the relationship between federal budgetary revenues, expenditures, deficits and the net debt (which is an accumulation of the deficits). These series are all expressed as percentages of GDP. Note that a deficit is shown as a negative surplus in the graph.

On average, between 1926/27 and 1929/30, the federal government ran a surplus of 0.92 percent of GDP (see table 1). On average, in the following seven periods, the federal government ran deficits. The average ratio has been greater than 3 percent during the 1940s, 1980s and 1990s. The ratio has consistently been greater than 3 percent since the fiscal year 1975/76.


Q: What is the composition of federal budgetary spending? How has it changed in the past decade?


A: During the fiscal year 1994/95, total budgetary spending was $162.9 billion (see table 2). 22.0 percent of spending consisted of Old Age Security and Unemployment Insurance payments; 20.9 percent covered spending by departments and agencies; 16.5 percent went to the provinces/territories under the Fiscal arrangements, Established Programs Financing and Canada Assistance Plan; 11.8 percent was paid out as other transfer payments and subsidies; 2.9 percent of spending was payments to Crown Corporations. In all, program spending comprised 74.2 percent of spending; the remaining 25.8 percent of spending consisted of debt charges.

For comparision, in 1984/ 85, program spending amounted to 79.5 percent of total budgetary spending and debt charges to 20.5 percent. It is estimated that debt charges will amount to 30.3 percent of spending in 1995/96.

Between 1984/85 and 1993/94, total spending increased annually, on average, by 4.1 percent. Average annual increases ranged between 6.0 percent on debt charges and -1.7 percent on Crown Corporations. Between 1993/94 and 1995/96 spending is expected to increase annually by 1.9 percent, whereas debt charges are expected to increase annually by 14.2 percent.

Sober Second Thoughts About the 1995 Budget

Michael Walker

[Ed: An earlier, shorter version of this article was printed in the Globe and Mail, March 6, 1995.]

Wishful thinking is when we think something is so because we want it to be so. Usually it is a term applied to the actions of children. But it is the only appropriate term to apply to the recent reception of the Canadian federal budget. We wanted so badly to have a tough budget that would deal effectively with our looming fiscal problems that we--including the editorialists of the Wall Street Journal--saw what we wished.

The government did its bit to ensure that our wishes were fulfilled by providing a hot front piece in the form of a putative 45,000 person reduction in the public service. That, together with a deep cut to the spending on subsidies to business and nicks to the subsidies to crown corporations, notably the Canadian Broadcasting Corporation, created the impression that this was a tough budget. Not only would the government meet its targets but, responding to the sense that things were getting out of hand it acted to cut spending even more.

The first clue that things were not what they appeared came in the budget night comment that for a tough budget it didn't much affect Canadians generally. Oh, there was an increase in the gasoline tax but other than that and a few zingers for wealthy trust holders, there was nothing in it. Life could go on much as before. Only business, the banks, and farmers would be hit, and not even the farmers really. An Angus Reid Poll published on March 2 confirms that more Canadians (43 percent) thought the budget too weak than thought it appropriate (39 percent). Those who thought it insufficient had good reason.

First of all, please note that the 45,000 person reduction in the size of the public service is not what it seems. More than 6,000 will transfer to the private sector or to municipal authorities as the airports and associated activities are shed. About 4,000 will get early retirement and 13,000 to 15,000 will be bought out of their jobs at a cost of $1 billion. The rest, about 20,000 will go as a result of attrition. In many cases--the government should say how many--the jobs which have been cut are not now occupied by anybody and are simply paper cuts leading, according to sources inside the government, to resistance to change since there is a view that "we can live with those cuts," without making radical changes.

Secondly, the most important force in this budget was not the effect of restructuring but the impact of an improving economy. Comparing the government's calculations of the past year (1994/95) with the current year (1995/96), program spending, i.e. excluding interest costs, will fall $4.3 billion but that includes a $1 billion fall in spending on Unemployment Insurance due to the improving economy and past changes in the program. Also due primarily to the improving economy, revenues will be $8.2 billion higher in the next year. (A two-to-one revenue increase-to-spending cut ratio.)

Meanwhile, we have fallen victim to the new-speak of government spending because there have, of course, not been spending reductions at all. Actual total spending next year will be $600 million higher than the current fiscal year and nearly three billion higher than was forecast this time last year. Incidentally, it doesn't look like that if you simply compare total spending in last year's budget with total spending in this year's budget. The reason is that last year's budget contains a 3 billion dollar contingency reserve. The reserve has been removed from total spending in the 1995-96 budget and included at a later stage in the calculation of the deficit projection.

Third, the cost of buying out the western grain transportation subsidy of $1.6 billion and the $1 billion in civil servant buy-outs are not included in the governments spending for 1995/96, the year in which the money will actually be spent. They are pushed back into 1994/95 when the government had a very strong fiscal performance due to unexpected strength in the economy. The rationale for doing this is that, following private sector practise, such expenses should be recognized when the decision to incur them is taken. Well and good, when convenient. In last year's budget, the federal government decided to spend $1.7 billion to buy out the maritime fishers who have no more fish to catch. That decision was not expensed at the time but will be expensed as the cash is paid out.

If the amounts to be paid to farmers and public servants were treated the same as the payments to the fishermen, there would be no change in the budget deficit projection at all. It would be $35.3 billion in 1994/95 and $35.3 billion in 1995/96. While the $35.3 billion is below the target ($39.7) for 1994/95 it is above the $32.7 target set for 1995/96. Of course, there will be future benefits from cutting the public servants and the grain subsidies, but only if the spending cuts can be maintained in the face of political opposition during the next year. In any event, the bottom line is that in a cash, out-of-pocket spending sense, the government does not meet its own targets for the current fiscal year.

This raises the fourth point. That is that the impression of toughness in this year's budget can only be sustained by considering the anticipated future effect of changes made this year. That is why the budget documents focus so intently on the two years following the actual budget year. What has been remarkable is the willingness of commentators to accept this futurescape without question. Whereas the government has only found it possible to cut $3 billion per year from program spending in the first two years of its mandate, observers have wishfully accepted without question their claim that they will cut $6 billion during the 1996-97 fiscal year, which will require another budget.

Perhaps the pundits noticed that of the total $6 billion to be cut from the budget next year, $3 billion will be passed along to the provinces in the form of cuts in their transfer payments. Whether the provinces will be able to cut that amount from their budgets or be tempted to resort to a tax raise that they can blame on the feds is yet to be seen.

But it is at the provincial level that we really get a true fix on the toughness of the federal budget. For, while the Finance Minister invited us to look at history and see this budget as the most contractionary since the budget which demobilized the Canadian economy following the Second World War, the appropriate comparison is with the budgets, increasingly common at the provincial level, which are reporting current year surpluses. The deficit faced by the Klein government of Alberta amounted to $3.5 billion or about $2,700 per working person in Alberta. It was cut to zero in 19 months. The federal deficit is about $3,000 per working person in Canada. If the federal government repeated the Klein budgetary performance over the next 24 months, the deficit at the end of 1996/97 would be $4 billion, not the $24 billion anticipated. The federal budget is $20 billion short of being tough. And if Finance Minister Martin didn't want to follow Conservative Premier Klein, he had the option of following either Liberal Premier McKenna or NDP Premier Romanow, both of whom brought in budgets without deficits.

The final point, related to the foregoing, is that in our wishful thinking exercise, we have unwittingly bought into a standard of expectation about the federal budget which is inappropriate. We have allowed the Finance Minister and the Prime Minister to set the terms of their own test. They have told us that the important thing is whether or not the government has met its targets. If they meet the targets they will succeed. Of course, the targets themselves imply a $100 billion dollar addition to the national debt over the next four years or so.

The objective standard they suggest, implicitly, is whether the international financial community will accept their fiscal stewardship. If we don't "hit the wall" in the sense that the budget doesn't cause a deterioration in the markets for government of Canada debt, then the government has succeeded. But such a standard is unacceptably low.

Our interest rates in real terms are at historic highs by comparison with the rates paid by other developed countries. In spite of that, our currency continues to languish at levels far below what would be suggested by a comparison of purchasing power with our major trading partners. That is to say, our currency reflects a chronic lack of confidence by Canadians and foreigners in our fiscal situation.

In our great desire to find this budget acceptable, Canadians have completely lost sight of the context. We have, in effect, concluded that since we haven't hit the wall, the budget must have been acceptable. The real challenge the government faced was to turn this situation around. If they had "done a Klein," for example, there is no question but that our interest rates would have fallen appreciably and our currency would now be strengthening. It is against that standard of performance that we should judge the budget.

The federal budget of 1995 was not tough. It was not decisive. It was not enough. The targets set by the government are not good enough and, properly reckoned, even they have not been met. It is another opportunity missed, and regrettably, if the economy misbehaves, or if there is another fiscal shock related to the Quebec situation, it may have been Canada's last chance to organize its fiscal affairs in an orderly fashion.

FTA\NAFTA: A Win-Win-Win Situation

Fazil Mihlar

Listen closely. Do you hear a giant sucking sound of jobs and investment moving from Canada to the U.S. and across the Rio Grande to Mexico as predicted by the critics of the Free Trade Agreement and the North American Free Trade Agreement (FTA\NAFTA)? The giant sound in Canada, the U.S., and Mexico is, in fact, the whir of high levels of economic activity. The evidence suggests that three-way trade is up, levels of investment have seen sharp increases on both sides of all three borders, and most importantly for Canada, Canadian productivity is up.

Trade effects

Since the implementation of the FTA in 1989, trade between the world's two largest trading partners, Canada and the U.S., has increased by about 75 percent, as compared with a 10 percent increase in Canada's trade with the rest of the world. Two-way trade with the U.S. now represents 78 percent of Canada's total trade compared with 69 percent in 1988. A study by the C.D. Howe Institute found that in product areas liberalized under the FTA, such as paper, paint, and office equipment, exports to the U.S increased by 33 percent between 1989 and 1992. In contrast, exports of the same products to other parts of the world increased by only 2 percent. Merchandise imports from the U.S. in liberalised product areas grew by 28 percent compared with 10 percent from other countries.

In the case of Canada-U.S. trade, NAFTA has picked up where the previous FTA left off. Canadian exports to the U.S. increased by 21 percent in the first nine months of 1994. U.S. exports to Canada rose by 19 percent. The addition of Mexico to the free-trade zone in 1994 is also paying dividends for Canadian exporters; exports rose by 16 percent in the first nine months of 1994, while imports of Mexican products increased by 32 percent. And U.S. exports to Mexico rose by 22 percent in the first nine months of 1994, while Mexican exports to the U.S. increased by 23 percent during the same period. The available evidence suggests that the FTA\NAFTA has been responsible for the rapid increase in trade flows between Canada, U.S. and Mexico.

Investment effects

Critics of FTA\NAFTA have argued that the agreements would result in a diversion of investment from Canada and the U.S. to Mexico. Indeed, some firms have relocated to Mexico. Investment opportunities for Canadian and American firms in the Latin American region has been expanding rapidly. Canadian and American direct foreign investment in Latin America accounts for about 15 and 6 percent of their respective direct foreign investment. Indeed, foreign investment in Mexico grew by 20 percent in the first eight months of 1994.

Although Mexico's attractiveness as an investment location has increased as a result of NAFTA, the choice of location by many firms is not only a function of labour costs, but also of labour productivity, intermediate input costs, transportation costs, and infrastructure. When it comes to long-term investment, Canada still appears to have the edge. Since the FTA was signed in 1989, foreign direct investment in Canada rose from $5,941 billion to $7,649 billion in 1993. Foreign portfolio investment (Canadian stocks) increased from $3,885 billion in 1989 to $11,910 billion in 1993. In fact, a growing number of firms are moving into Canada. Phillips, a Dutch electrical products group, decided last autumn to shift two light-bulb production lines from Mexico to London, Ontario. Chrysler is setting up a research unit in Windsor, Ontario, across the river from Detroit. Toyota is spending $600 million to more than double the capacity of its Corolla assembly line near Cambridge, Ontario, to 200,000 cars a year. Contrary to the critics of FTA\NAFTA's claim that there would be a "giant sucking" of investment and associated jobs down to Mexico, investment levels are up in all three NAFTA countries.

Productivity effects

Strange as it may seem to anti-free traders, FTA\NAFTA has helped to make Canada a more attractive place to invest. Increased competition from the U.S. and Mexico has spurred Canadian firms to improve productivity, largely by investing in new plants and machinery. According to the OECD's latest survey of Canada, lower inflation-adjusted interest rates and falling prices for office and industrial equipment have encouraged many firms to substitute cheap capital for expensive labour.

Since the implementation of the FTA, Canada has gone through a period of significant economic restructuring. Unit costs have fallen, and productivity has increased. Free trade has contributed to this process. Productivity changes have been greater in liberalized industries than in non-liberalized sectors. Liberalized sectors of the economy had a 26 percent increase in productivity between 1988 and 1993 on average. In contrast, other sectors of the economy only had an average increase in productivity of 6 percent over the same period. This evidence confirms the argument that trade liberalization leads to increased competition and in turn results in higher levels of productivity.

Conclusion

The success of the FTA\NAFTA should not be a surprise. The evidence suggests that an increase in trade flows, investment levels, and the level of productivity in the Canadian economy has taken place. Gains associated with greater market access, exploitation of economies of scale, and increases in productivity translate into lower prices and a higher standard of living. And, trade expansion is a boon to average working families who get greater choices, lower prices, and jobs in firms serving fast growing overseas markets. Trade protection, on the other hand, only favours narrow business and labour interests.

Bibliography

The Economist, "Happy Ever NAFTA?" December 10, 1994, pp. 23-24.

The Economist, "Northern Rumblings," January 14, 1995, pp. 26-27.

Gelbard, Enrique, "Econo Views: Effects of Economic Integration-FTA, NAFTA and Beyond," Toronto: Economics Department, Royal Bank, December, 1994.

Globerman, Steve and Michael Walker, "Assessing NAFTA: A Trinational Analysis," Vancouver: The Fraser Institute, 1993.

OECD, "OECD Economic Surveys: Canada," Paris: OECD, 1994.

Statistics Canada, Canadian Economic Observer: Historical Statistical Supplement 1993/94, Ottawa: Statistics Canada, 1994, p. 59.

Letters

Correction

Dear Editor:

I have a couple of points regarding the letter of mine that was published in the January 1995 edition of Fraser Forum. First, the figure for net equity used in the letter should have been $1.75 billion (not $175 billion). Second, I did not realize that such letters were published if they were not addressed to Fraser Forum. Is this the usual policy? If so, I think it would be a good idea to contact the author to check whether they wanted it published. . . .

Norman LaRocque,
The Treasury,
New Zealand

Robin Richardson responds:

I apologize for the mixup in communications with respect to your not being contacted before we published your letter on the financial reporting of advanced educational institutions in New Zealand. Our procedure is for the editor of Fraser Forum to contact correspondents and this did not happen in your case. As your original letter was to me, however, I take full responsibility for not contacting you myself. I hope you accept my personal apology and that you have not experienced embarrassment as a result of our publishing your letter.

We value your correspondence very much and trust that this unfortunate mixup does not stop you from commenting on future articles and publications on matters of mutual interest.

What is a family?

Dear editor:

Informed and reasonable people agree that the only way to begin to pay down Canada's huge public debts is through program-spending reductions. The Fraser Institute has for some years now been recommending one apparently neat and ideologically neutral way of taking a giant step in that direction: by clawing back social-security benefits to families earning above-average annual incomes. This alone could save the federal government up to $20 billion per year.

Or could it? The problem is that our taxation system is built upon the reporting of individual incomes, not family incomes. To change the system in such a way that Revenue Canada could identify those individual recipients whose benefits need clawing back due to the earnings of family members might prove to be inordinately difficult and disruptive.

The first problem is to define the term "family," a notoriously ideological issue. What is needed is a clear and objectively determinable criterion that can be used in all relevant contexts: for taxation purposes, divorce and separation, spousal benefits, etc. This definition cannot be subject to manipulation, for example by persons claiming to be "family" on the benefits side of the equation, but individuals on the claw-back side. (If homosexuals are to be granted spousal benefits, they should also be subject to having their UIC benefits clawed back when they and their partners make a joint income over the average.)

The second problem is to create a total tax-and-benefit system which provides incentives to keep families together, not tear them apart. Already the Canadian tax system in effect discriminates against married couples; any further claw-back measures must not be on balance so onerous that they create further economic incentives for families to break up. If a claw-back scheme were to cause divorce rates to escalate, the social devastation could easily outweigh the immediate economic savings. A claw-back proposal cannot be instituted in isolation from an overall review of the social-benefits package.

Could anyone at The Fraser Institute set out in more detail how to reduce the deficit by focusing the tax-and-benefit systems on families rather than on individuals?

Grant A. Brown
Faculty of Management
University of Lethbridge

Michael Walker responds:

While there are undoubtedly problems in defining family income, the federal government has at the moment already implemented a definition for the purposes of the child tax credit, namely, the income of the parents. This family income is used to graduate the eligibility for the child tax credit and it is simply the application of this definition of income that we propose for the clawing back of social programs or eligibility for those programs if there was a desire not to pay them out in the first place. Put another way, why should there be one standard of qualification for the child tax credit and an entirely different one for other benefits?

Nova Scotia Medical Board disagrees

Dear Editor:

I'm writing with respect to the article in the January 1995 edition of Fraser Forum by Cynthia Ramsay.

Ms. Ramsay states that the Nova Scotia government ". . . has officially recognized, after much dissension, complementary medicine by including the cited subsection of the Helsinki agreement in the province's Medical Act". . . . As the individual whose job it is to enforce the Medical Act, there is absolutely nothing in it which even comes close to the sited subsection of the Helsinki agreement. I cannot imagine where Ms. Ramsay obtained this information . . . .

Ms. Ramsay also states that two doctors ". . . also lobbied successfully to change the Medical Act of Nova Scotia to include registered practitioners of complementary medicine." There has absolutely been no change in the Medical Act of this nature as a result of any lobbying by these or any other doctors over the past several years.

While I have profound disagreement with the opinions of the author, when the information given is so far removed from reality, it destroys any credibility for the author and reflects poorly on the Institute itself.

C.D. Little, Registrar
Provincial Medical Board of Nova Scotia

Cynthia Ramsay replies:

I overstated the progress towards the acceptance of complementary medicine in Nova Scotia in "Freedom of Choice in Health Care" (Fraser Forum, January 1995). While the Nova Scotia Medical Act recognizes homeopathy, osteopathy and "systems different from that taught in the usual schools of medicine" in Section 16, it does not state that a practitioner's therapy must have a safety risk unreasonably greater than prevailing treatments before being found guilty of unbecoming conduct, or of being unfit to practice medicine. However, complementary practitioners were granted a subsection in the Medical Society Act, an act of the Medical Society, a non-profit, professional organization that represents almost 2,000 of the province's doctors.

Math non-standards

Dear editor:

The last sentence of the book The World of the Stars by the Russian astronomer P.P. Parenago describes Joseph Stalin as the "greatest genius of all mankind." Grandiosity aside, such a claim about a dictator, having no connection to astronomy whatever, is so jarringly irrelevant in a book about stars that it seems comical to us, half a century and half a planet away.

Of course, comedy is relative: terrible events in Parenago's time made any comedy in his words difficult for many of his contemporaries to recognize, let alone appreciate. They would regard Parenago's statement as normal, if not inevitable, but certainly not funny. Likewise, others in another time and place might find our routine foibles, printed here and now, to be side-splitting nonsense.

A candidate for this sort of cross-time, cross-cultural comedy is the publication Provincial Standards: Mathematics of the government of Ontario for 1993. It contains, despite its title, neither standards nor mathematics to speak of, although it surely is provincial. It is 60 or so pages of incoherent filler punctuated by irrelevant ideology.

The document contains tortured compromises between ideological fads in education, and common sense. For example, the trendy view that it is bad to rank performance with grades through testing coexists awkwardly with platitudes about quality control. The attempt is made to have it both ways by abolishing pesky grades in favour of euphemisms for grades, and preaching alternatives to "traditional paper and pencil tests." Of course, anyone can see that the proposed "superior," "proficient," and "adequate" performance ratings proposed in the document are easily translated into A, B, and C respectively. Furthermore, for mathematics, who really thinks that having students prepare "journals" about their mathematical experiences, or holding "student self-assessments" can be any substitute for genuine testing?

Plainly, there is discomfort here with the notion of individual achievement. This discomfort appears in its most bizarre form in the explicit quotation of maximum limits on what can be expected of a student's mathematical performance by the end of grade 6. Surely minimum performance is what any reasonable standards should require, if we value the individual successes of our children.

Furthermore, students are asked to "bear in mind that many currently held views reflect a Eurocentric perspective." What do these questionable statements have to do with mathematics, anyway? Surely they are as irrelevant to a document on mathematical standards as Parenago's claim about Stalin in a book about stars. Of course, Parenago would know that while comedy is relative, mathematics is not. He would likely laugh at us for producing this official document suggesting otherwise.

Christopher Essex
The University of Western Ontario
Faculty of Science

Good Debt, Bad Debt and Other Fairy Tales

Michael Walker

The national debt is like a mortgage and we should be no more concerned about the national debt than we are about the mortgage debt which most Canadians have during their lives.

This is one of the ploys that has been used recently by advocates of the position that the deficit doesn't matter, that spending should not be cut and that those like myself who are concerned about the situation are in the grip of a kind of hysteria. Another ploy actually adopted by seven provincial governments, including B.C., is to simply reduce their deficits by capitalizing expenses on items like roads, schools and hospitals. These spending items are then said to be an investment and recorded off the books.

Let's look at each of these.

First, the national debt is not like a mortgage. A mortgage is a liability against which the family has acquired its house as an asset. If the family's income falls, the house can be sold and the proceeds from the sale used to pay off the mortgage. In fact, for most families, the mortgage is the counterpart of the biggest asset they have.

The national debt has been incurred for the most part to support current spending--very few assets have been directly acquired as a result of this borrowing. Not that Canada does not have assets. Of course we do, and some of them might be saleable in an emergency. But there is no ready market for quarter-mile sections of the Trans Canada Highway. The value of a hospital or school can actually be negative since the costs of removal might exceed the developed value of the land.

The point is that the readily saleable assets we have are dwarfed by the national debt. For all practical purposes, the national debt is much more like a credit card balance than a mortgage. That is the analogy we should be using. And, at the moment, the total debt of the federal government and the provinces is equal to the national income. In family terms of the mortgage analogy, our national Visa bill is the same as our annual income. And that is a worry!

The second flim flam used by 7 provincial governments is to actually cook the books to make their situation appear better. The trick is to shunt off into a non-budgetary account capital spending that once was included in the budgetary spending amounts. Of course, if you are a Certified General Accountant or a Chartered Accountant, you may not be fooled by this. But a generation of journalists has been so deceived--which is of course why governments persist in doing it.

The main reason for not doing it and including all government spending in the budget and on a current basis is that if a current parliament is allocating funds for any purpose, they should have to extract those funds from the electorate which then has the opportunity to comment on the choices through the ballot box. Borrowing to fund current spending puts off the evil day of payment and thus displays a lower cost of current spending to the electorate.

Advocates of funny book-keeping protest, "But, but, spending on schools is for the future as well as the present, and hospitals last a long time, and roads are the infrastructure of the future. We should therefore pay for them over time, not all at once." To see the fault in this seductive reasoning, one has only to follow it through to its logical conclusion. The education spending of today is the workforce of tomorrow, therefore we should capitalize education spending. The health care spending of today will ensure a healthier population tomorrow, therefore we should count all health care spending as an investment. And let's not forget the investment we make in our "human capital" in the form of university spending, the welfare we invest in single mothers to ensure their children don't grow up in debasing poverty, and the all-important investments in research, job-training under the UI program, and in the work of Canadian artists and writers to ensure that we have a culturally-enriched future.

See what I mean? There is no logical place to draw the line. It should be drawn on the basis of whether or not spending is financed by taxes. If the spending is financed through taxation, then it should be acknowledged in the year when it is spent. Otherwise, future taxpayers will pay for decisions made by their predecessors. That means that current taxpayers have a bias to opt to spend money on capital projects because they will not have to face the fiscal music for their decisions. Since there is no independent safeguard that such capital spending will be wisely done and have value, I can see no practical alternative to pay-as-you-go, even though from the private sector accounting perspective this seems a very exacting standard.

The main point is that while many if not most public capital spending does create value, there are many instances where hospitals, schools and recreational facilities have been built in a way that creates a net loss for society, and it is difficult to tell the good projects from the bad ones. Thus, we need to treat them all as though they may be loss makers, and write them off as we build them.

The only other approach that has merit, discussed in a companion piece by Robin Richardson in this edition of Forum, is to set strict limits on the extent to which current tax revenues may be used to fund debt. This is a compromise between the no capitalization under any circumstances position and the open-ended policy with associated flim flam which is the current position of many provincial governments in Canada. The debt limit approach is, however, a pragmatic policy rather than one based on sound principle.

Sexual Harassment--The Witch Hunt

Karen Selick [A version of this article has also appeared in Canadian Lawyer.]

A few months ago, I spoke at a Fraser Institute student seminar on the subject of sexual harassment law. In preparing my speech, I re-acquainted myself with the Law Society of Upper Canada's guidelines on sexual harassment policy. This 50-page document had been sent out in 1992 to every law firm in Ontario, to make sure that we lawyers implemented the suggested policies in our own offices. Every time I re-read it, I feel as though I've entered the Twilight Zone. This stuff is scary.

The excerpt which best encapsulates the horror of the sexual harassment witch hunt is a subtitle, ominously printed in bold, capital letters and underlined: "SEXUAL HARASSMENT ENCOMPASSES MORE THAN YOU THINK."

Hmmm. If sexual harassment encompasses more than most of us think, who are the people who know exactly what it encompasses? And if only a handful of unidentified cognoscenti know what it encompasses, what prompted our legislators to outlaw it under various human rights laws?

The guidelines set out 13 different types of sexually harassing behaviour which lawyers are supposed to discourage in our offices. Of course, it cautions, the list is by no means exhaustive.

Guess what the last item on the list is. Are you ready? It's sexual assault. No kidding. We are supposed to discourage our lawyers and staff from sexually assaulting each other. God, am I ever glad they told me!

I checked my Criminal Code to see when Parliament had repealed sexual assault as a criminal offence. By gosh, they hadn't. Nor had they repealed extortion, or intimidation. So the worst of the sexually harassing behaviour that we're supposed to be on guard against is behaviour that could already have landed a perpetrator in jail, even without any amendments to the Human Rights Code.

And of course sexual assault, or any assault, and battery are all torts (wrongs) which entitled a victim to sue for redress centuries before the Human Rights Code was thought of. Tort law is well settled on this point, even though it may not be known by every member of our society: any intentional offensive contact, or the imminent threat of it, constitutes a battery or an assault.

So what does the Human Rights Code prohibition against sexually harassing behaviour add to civilization? An example in the Law Society guideline says, "Suppose that a person, with no intention of offending, makes a sexist joke which is neither gross nor vulgar but which nevertheless causes embarrassment to someone. This may constitute sexual harassment. . . ." In other words, it is now illegal to cause someone embarrassment in the workplace. It is illegal to be insensitive. It is illegal to be impolite.

What other unspeakable acts will we be protected from? Well, leering, for one. Yes, Orwell's worst nightmares have come true. Our rulers are now attempting to control by law the expressions that people may have on their faces. What else? The display of sexually offensive material is also forbidden. Suppose I subscribe to National Geographic and they publish some photographs of primitive tribesmen wearing little or no clothing. Do I have to banish the magazine from my office?

What ever happened to that ancient legal maxim, de minimis non curat lex (the law does not concern itself with trifles)? Wouldn't it be better if those embarrassed by non-gross, non-vulgar sexist jokes, leers or pictures simply took an assertiveness course and polished up a few incisive put-downs and withering glares of their own?

Why do some people--mostly women, it seems--want to create a false picture of reality for themselves? An insensitive, macho boor is not going to change just because a policy of censorship is being enforced. He will simply become a silent, skulking, insensitive macho boor. Personally, I prefer to know as soon as possible when I'm dealing with one of these jerks. I think they should be permitted to identify themselves so that women can quickly sort them out from the nice guys.

The most vicious part of the sexual harassment witch hunt is the case law holding employers vicariously liable for acts of sexual harassment among their employees, if they fail to take steps to prevent or rectify it. But what steps are enough? Does an employer have to expose himself to a wrongful dismissal lawsuit by the alleged harasser in order to avert a sexual harassment lawsuit by the alleged victim?

One way for employers to protect themselves would be to screen out potential offenders before they are hired. This, too, is forbidden in Ontario. Sexual harassment is an offence, and employers are not allowed to question job applicants about their record of offenses. Hiring people becomes a game of Russian roulette.

The guidelines suggest that there is a peripheral field of behaviour which doesn't quite come up to the standards of sexual harassment (low as they are), but could be called "gender-based harassment." This behaviour might include "patronising comments addressed to a person of the opposite sex, drawing attention to that person's sex and having the effect of undermining the person's role in a professional or business environment."

What could be more patronising than this entire policy? How better to undermine the professional image of working women than to make our male colleagues believe that we need or want this sort of nonsense to protect us from them?

North American Unionism: Trends and Outlook

Leo Troy

[Ed: Professor Leo Troy, one of North America's most distinguished experts on the role of unions in labour markets, is engaged in a book-length examination of the future of unions in North America for The Fraser Institute. He has recently completed a preliminary report outlining the major issues; this report is available upon request from The Fraser Institute.

The following is Prof. Troy's summary of the issues considered in the research bulletin which itself indicates the scope of the research contained in the larger project.]

Private versus public

Fundamental to any assessment of what unions do and why, within and across countries, is the dis-aggregation of the private and the public sectors of unionism, the labour market, and the economy. Within countries, the two union groups operate in different labour markets, have different philosophies, enrol unequal numbers of members, penetrate their respective labour markets to significantly different degrees (the public sector is everywhere far higher), experience different life-cycles, and affect the economy and society in different ways. Analytically there are two, not a single union movement within countries. Affiliation with a common federation notwithstanding, each of the two union movements probably has more in common with its international counterpart than with its domestic complement. If the two wings of organized labour are treated as an entity, analysis of trends are distorted within and across countries. For example, public sector union membership dominates the make-up of the labour movement in Canada, while the reverse is true in the U.S. Hence, comparison of the overall union movements in the two countries is misleading--it is an apples-to-oranges comparison.

This article briefly summarizes union trends both in the private and the public sectors in Canada and the U.S. and is a prelude to new data from official sources on Canadian unionism and employment, private and public, 1988 to 1992, that the author is developing with support from The Fraser Institute. New data on the U.S., some of which are reported here, will be part of that study. Completion is anticipated by Autumn, 1995.

Employment and unionism

Official Canadian statistics on employment and unionism combine private and public data across most industries. Quantitatively, the public/private consolidations in the service industries, notably health and social services, and education are the most serious problems inhibiting analysis. In the U.S., a similar, but far smaller issue affecting the health services has emerged as a result of extensive government subsidies. These matters will be addressed in the final report.

Based on the author's previous studies, private union membership peaked in Canada in 1979 at 1.5 million, and the top rate of unionization, attained in 1958, was 34 percent. For the U.S. private union membership peaked in 1970 at 17 million, and the top penetration rate was reached in 1953 at 36 percent. By 1992 the author estimates that Canadian union density had tumbled to 18 percent, and is believed to have dropped further by 1994. In the U.S., private unions' market share dropped to 10.9 percent in 1994. For Canada the 18 percent rate was previously experienced in 1941 and before that in 1936-1938. For the U.S. the current 10.9 percent was reached in 1938, and once before in 1917. Private sector union membership shrunk by about 7.25 million members in the U.S. between 1970 and 1994. For Canada, the author estimates that the loss in private sector union membership between 1979 (the perceived peak) and 1992 exceeded 200,000. This reduces the estimated 1992 Canadian private union membership to about 1.3 million which, again, has since declined further.

The U.S. led Canada both in the timing and the extent of the decline in private sector unionism. What is significant about these declines? In both countries, union membership in manufacturing (the keystone of private labour in all advanced countries) declined far more than employment. For example, in Canada, between 1979 and 1992, union membership in the manufacturing sector shrunk by virtually one-third (33.2 percent). In contrast, employment declined by just under one-half that rate (16.6 percent). These disparities mean that nonunion employment rose in Canada, just as it had in the U.S. The combined effect of membership loss and nonunion employment growth reduced manufacturing union density in Canada from 44.5 percent to 35.2 percent over the same period. Further, these figures indicate that there is a convergence (a movement in a similar direction) in trends between the two countries (Troy, 1992). The trend toward de-unionization in the private sector (and thus convergence) is also statistically apparent in all other advanced industrial economies as well (Galenson, 1994; Troy, 1990).

There was also convergence in the explosion of public sector unionism in both countries over the past several decades. But in this instance, Canada led and the U.S. lagged. Even though public sector union membership jumped in both countries, the rate of increase was insufficient to offset the decline in private sector unionism. As a result, the average market penetration fell in Canada and the U.S.

The final report will address reasons for the lag of Canada in the decline of private unionism and its lead in public unionism and will also examine representation election statistics in the private sector. For Canada, the comparison will be limited to Ontario. The central issue is to test the conventional wisdom which contends that Canadian unions have been more successful in organizing the unorganized than have American unions.

Another statistical issue will be the official Canadian data on unionism in construction--they are clearly exaggerated. Thus, for Quebec in 1991 and 1992, the number of union members actually exceeds employment. The reasons are dual membership, seasonal employment, and how data are collected. There are parallel issues in some other industries, but they are not as egregious as in construction.

Outlook for North American unionism

The factors which have driven private sector unionism down and public sector unionism up in both countries will continue into the next century. Thus, I anticipate that private sector unionism will decline in both countries. For the U.S., I expect that private sector union membership will drop from its 1994 level of 9.6 million to 8.4 million by 2001. Market share will probably drop to 7 percent of nonfarm employment, about the same as it was at the beginning of the 20th century.

The final report will also examine the durability of public sector unionism: can it be expected to enter a period of decline in both countries?

Bibliography

Galenson, Walter, Trade Union Growth and Decline, Westport: Praeger, 1994.

Troy, Leo, "Is the U.S. Unique in the Decline of Private Sector Unionism?" Journal of Labour Research, Spring, 1990.

Troy, Leo and Neil Sheflin, Union Sourcebook, Irdis: West Orange, 1985.

U.S. Department of Labor, Bureau of Labor Statistics, Annual Reports on Labor Organization.

Rejecting the Welfare State

Chris Sarlo

For at least the past 25 years, the dominant position in the social policy debate has clearly been that promoted by defenders of the welfare state. While there are a number of variations, welfare statism takes the view that free markets not only encourage primitive, anti-social behaviour but also result in substantial economic inequality. As well, free markets are sensitive to swings in business expectations which result in large fluctuations in economic activity (business cycles). Therefore, a strong government is required to introduce both fairness and stability into the economy. The welfare state redistributes income from the more well-off to the less well-off through a variety of social programs. Proponents of the welfare state typically argue that approximate equality of outcomes via state action is desirable.

Any serious review of social policy must involve, to a great extent, a critical examination of both the principles and practice of the welfare state. Regarding the latter, there is mounting evidence that the welfare state may, in fact, be the cause rather than the cure of social and economic problems. In a previous article in Forum, I reviewed Tom Courchene's analysis of the pathologies of Canada's social programs. As well, The Fraser Institute has published a number of studies critically evaluating aspects of the welfare state in practice.

What about the welfare state in principle? Is it the case that state intervention and redistribution to promote "fairness" is appropriate and that we must simply continue to experiment to find programs that work? Or is it the case that the very foundation of the welfare state is questionable? Let me consider the latter possibility by critically examining several fundamental assumptions and propositions of the welfare state.

1. Profits are evil. This view stems, apparently, from Marxist analysis which regards profits as the result of paying workers less than the value they produce (exploitation of labour). Economists have long argued that this view is faulty because it ignores an important factor of production--entrepreneurship. The entrepreneur provides the initial idea, invests the capital, designs the production process, and takes the risk. Without the driving force behind the enterprise, other factors lie idle. Profits, then, are the (by no means guaranteed) reward for risk-taking and entrepreneurship. If we tax profits, we simultaneously tax enterprise and, as a result, we will get less of it.

What about monopoly profits? Aren't there firms that continually earn large profits, year in and year out? Economists would suspect that the existence of continuous large profits results from government protection or some other regulatory restriction. Eliminate all such protection and restrictions and competition will reduce both prices and profits.

Can't state enterprises provide the spark, the capital and the organization required for a dynamic economy? The problem here, simply put, is that managers of state enterprises have neither the profit incentive nor the fear of major loss to cause them to invest themselves fully in the enterprise and make wise economic decisions. They are, we have to remember, spending other people's money. In addition, state enterprises inevitably serve political as well as economic functions.

2. Inequality is bad. Egalitarianism is, arguably, the quintessential socialist principle. Welfare statists insist that it is not sufficient to have equality before the law and non-discriminatory hiring practices. There must be, according to some apparently obvious tenet of fairness and justice, approximate equality of material outcome.

Economists point out that much of the observed inequality of income and wealth is explainable by age. That is, young adults have little of either when they begin their careers but typically become more prosperous as they gain experience, skills and responsibility. Peak earnings (usually in the ten or so years before retirement) are often two or more times (in real terms) initial earnings. Even if everyone had exactly the same lifetime income there would be substantial inequality of income and wealth at any point in time due to age differences.

But isn't wealth generally handed down from generation to generation, so that the rich simply get richer? Despite the popularity of this aphorism, the reality is much different. For every person who inherits a million dollars, there are hundreds who accumulate that much after years of hard work and wise management. Opportunity and upward mobility continue to be a pleasant fact of life in Canada.

However, the relative unimportance of inherited wealth is irrelevant to the question of fairness. The right to own property must include, if it is to mean anything, the right to dispose of one's own property. If an individual has rightly earned wealth, that is, has not obtained it by force or fraud, then what moral claim can others have on that person's wealth? Why should members of a community interfere with someone's income unless it has been stolen from them?

3. The welfare state occupies the high moral ground. Welfare statists may grudgingly admit that the result of income redistribution and various social programs is a smaller pie but will proudly claim that, at least, their position is morally correct. The society that has less but shares more is better than a society that has more but shares (at least via the state) less. To some extent, this view stems from an admirable sentiment of concern for the well being of others. On another level though, there is a touch of arrogance here. No one has a monopoly on compassion. All of us want to see poverty and suffering eliminated.

What I find curious is that a great many people who are not supporters of the welfare state nevertheless acknowledge its moral superiority. They favour free markets, not on moral grounds but rather on efficiency grounds. There is a real danger in this. What if some police state

could deliver more output? Material gain should not be the criterion we use to judge the ethical correctness of our social arrangements. It seems clear to me that the morality of the arrangements themselves is of primary importance. Social and economic arrangements based on property rights and the repudiation of force, it can be argued, occupy high moral ground. By comparison, the welfare state is coercive and authoritarian. The fact that free markets "deliver the goods" is a happy (and not surprising) coincidence. My advice to supporters of a free society is: Stress morality.

Proponents of the welfare state believe that the state can improve people's lives and make outcomes more fair. Opponents tend to argue that state intervention and redistribution may improve the living standards of low-income folks in the short run but make them worse off over time by harming both the economy and initiative. They should add that the welfare state is based on the premise that it is alright to use force for a good cause. The social policy debate is ultimately about the questions of morality and the appropriate role of the state.

Student Article:                                                                      Taxes--Equitable, Efficient, and Effective

Tracey Nicholls-Taylor

[Post-secondary students from across Canada are invited to submit articles to The Fraser Institute's student newsletter, The Canadian Student Review. In the Fall and Spring of each year, the best articles are selected and the Review is published. This article is from the Spring 1995 issue. Tracey Nicholls- Taylor is an accounting student with the CGA Association of B.C.]

The criteria generally used by economists to judge a tax system are equity, efficiency, and effectiveness. Let us use these same criteria to demonstrate that, of all possible types, a consumption tax is the least market-distorting form of taxation.

Equity is broken down into two concepts: horizontal and vertical. Horizontal equity exists when everyone suffers the same degree of "punishment" as his neighbour, whereas vertical equity exists where the tax system attempts to solicit greater contributions from higher-income earners. A consumption tax is the most equitable type of taxation as people tend to follow similar consumption patterns to others in their income range (horizontal equity) and rates of consumption increase in conjunction with income levels (vertical equity).

Efficiency is measured in inverse proportion to the amount of distortion to market efficacy; the imposition of a tax impairs the free market's supply and demand equilibrium. Most forms of taxation will have this effect and will cause inefficient allocation of resources to a greater or lesser degree, depending on how strong the demand is for a given product or commodity. A consumption tax will have a greater impact on per capita and the percent of spending on luxury goods as opposed to food and other necessities. If one is to judge taxation solely by its effects on market operations, it becomes obvious that most other forms of taxation, relative to a consumption tax, are undesirable as they subvert the voluntary market transactions by which our society functions.

Effectiveness entails the ease with which a tax is administered and collected. A single rate tax applied to all goods and services and collected at the point of sale would be relatively easy to oversee, would be cost efficient, and would be anonymous. If all taxes were collected at the point of sale, Revenue Canada's vast data banks of extremely personal information would be unnecessary. As tax evasion is driven by disillusionment and discontentment with the current system, a system that is both fair and seen to be fair would encourage greater compliance.

The accumulation of capital, which is a lubricant of economic growth, is adversely affected by taxes. Since consumption taxes provide a disincentive to spend, they encourage capital accumulation and investment. The more that we, as citizens, invest in our capital markets, the greater the proportion of our income that is saved. With increased savings, the cost of capital decreases, thereby inducing greater investment and, in turn, stimulating economic growth. In addition, higher savings rates also mean greater self-sufficiency in retirement which would relieve us, either wholly or in part, of the necessity to off-load unfunded pension obligations to unborn generations.

In essence, under a consumption tax system, the taxpayer is taxed according to what he takes from society rather than what he contributes to it. Tying taxation to purchasing power as opposed to earning ability means that you pay for what you get and, conversely, get what you pay for.

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