The Anatomy of a Middle Class Shakedown: Quebec Budget

In my last post on the Quebec budget I focussed in the regressiveness of the of the 2010-1011 budget vis-a-vis working poor families. There it was demonstrated that the budget was regressive in that some working poor families and individuals would actually face an increase in their taxes even after the Orwellian named Quebec Solidarity Tax Credit (QSTC) was taken into account. Today I want to focus on the regressive nature of the budget as it applies to the middle class.

One of the striking things about the tax increases in the last budget is the degree to which (for those families above a minimum wage income) the budget is progressive to the 60,000$. It is progressive in the sense that as income increases so too does the percentage of new taxes as a share of income. However, after 60,000 the new taxes go regressive with those earning above 60,000 paying a smaller amount of taxes as a share of their income. As the graph clearly shows, a family of four with an income of 60,000 will pay almost 1% more tax as a share of their income whereas a family with an income of 125,000 will pay 0.6% more tax as a share of their income.

The reason for this is explained by three factors. First almost all the taxes announced were regressive, that is, individuals pay the same rate regardless of income. Second, the 200$ health premium is not phased in. Third, nor is there a smooth phase out of progressive tax credits and transfers. The result is, well, the graph below.

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(Click on image to enlarge)

For single individuals the situation is even more weird. As the graph below illustrates the budget re-enforces what can only be described as an economic basket case when it comes to taxing single individuals in Quebec. Between 10,000 and 15,000, thanks to the QSTC the budget is progressive. But because of its ham fisted implementation and the three points outlined above the taxes are regressive from 15,000 to 40,000. The result is that those earning 40,000 will pay less taxes as a share of their income than someone making less than minimum wage! Then the trend goes progressive between 40 and 50,000. At which point the tax trend goes permanently regressive with someone making 125,000 a year paying a lower percent of the new taxes as a share of income than someone making 50,000.

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This budget is what many economists have called an adult budget and an efficient budget. Professionals in illegal lines would probably characterise this budget as an efficient shakedown.

As is by now well known one of the stories of globalisation is a polarizing of income with those in the top of the income distribution pulling away from the middle class. In turn, the top half of the middle class has been doing quite well (a post on that later) while the bottom half of the middle class has been subjected to stagnant or decreasing incomes. What this budget does is reinforce the in-egalitarian distribution of market incomes.

To be clear the plaint here is not that raising taxes is necessarily a bad thing: quality public services cost money. The question here is over the distribution of the tax burden. By refusing to use the progressive income tax system and instead rely on a hodge-podge of user fees and consumption taxes the government has chosen to let those towards the top of the income distribution shoulder a smaller percent of the burden.

This is tax regression in action, and if not checked it will likely become an important aspect of the story of how Quebec became much less equal place live. For the economists who lauded the budget, most of which it should be mentioned earn over $75,000 a year, I suppose this is just the price of efficiency.
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Note: data is taken from budget tables 36 and 38. Impacts were estimated using budget methodology for individuals at 15,000 and families at the 31,000 levels. A hydro increase of 58$ was added to the tax increases. The budget numbers do not include the proposed 25$ per medical visit fee.

Quebec Budget Take 2: More Regressive than Progressive

In my last post on the Quebec Budget I was in error when calculating the threshold at which the budget became regressive for the working poor. Specifically I set the threshold two low. Instead of 25,000$ for a working family of four it should have been set at 30,345.

Also I should have included a definition of working poor. While most poverty measures are considerably higher I will define working poor as anyone earning the minimum wage or less. In Quebec the minimum wage is around 18,000$. Thus a family of four with two working adults making $36,000 or less is defined here as working poor.

Also there are two issues here: the degree of progressiveness in taxation and the degree of poverty alleviation or (cash transfers). The first is metric of who pays and how much as a share of their income and the second is how much is redistributed. Consumption taxes such as gasoline and sales taxes, user fees, and health premiums are examples of regressive taxes. The regressiveness of these tax measures can be partially, totally, or more than offset by redistribution in terms of transfers (cash or tax credits). Moreover as my initial post noted the gasoline tax will presumably have beneficial externalities if and only if it drives down gasoline consumption and or increases public transit efficiency and infrastructure.

Ok so enough with the preamble: The Quebec budget is both progressive and regressive for the working poor and it almost entirely comes down to the health premium and the fact that it is not a function of income accept at the lowest income levels where the 200$ premium will not be charged. If you click on the PDFQuebec Budget you will see that I have reproduced table 36 and 38 of the budget document with two estimates included: for a family of four with two working adults @ 31,000$ a year and for a single working individual @ 15,000$ a year (both in bold).

One of things that jumps out is just how sneaky the government was in using 10,000$ wage increments. For a family of two it made it look as though it was only @ 40,000$ the health premium kicked-in and for a single individual @ 20,000. But as table 30 of the original budget document indicates the health premium kicks in 30,345 for a family of four and just under 15,000$ for a single individual.

If we then do the workout for as I have done in the estimates made in the PDFQuebec Budget”> it becomes clear that for working families making below the 30,000 threshold the budget is seemingly mildly progressive to the tune of 145$. But a family of four making 31,000$ is made 155$ worse off. So what is happening here is that the working poor are subsidising other members of the working poor. That is an odd way of defining a budget as progressive and to say the least a very odd definition of redistribution. Single poor people are even worse off. A single individual making 15,000$ a year is made 83$ worse off and @10,000$ a year 149$ better off.

The other sneaky thing in the budget tables is that they divide the Solidarity Tax Credit (QSTC) by the number of taxpayers not by the number of individuals in the house. To see why this matters consider the column “compensation per individual.” So a family of four below just below the $30,345 cut off will be made only 37$ better-off per individual member of the household.

But the real point is this the budget is regressive for some members of the working poor and progressive for others. At this is even more the case if one factors in the hydro increases which the minister claims will be offset for poor households via the QSTC. Both the scheduled and then budget + increases to hydro amounts to 70$ a year for an average household. so that means the model family of four at the just below the $30,345 cut off will see only be 80$ better off or 6.66$ a month better off.

Now I am not an expert on poverty but I do know the 6.66 a month, less than 2$ per household member, is hardly a poverty alleviator. Moreover the QSTC is not inflation indexed until 2013 so we can claw-back another 6 to 9% in terms of real purchasing power. That too goes against the claim made in the budget that the Quebec government is maintaining the income of poor quebecoise.

Why increasing tuition fees is not the solution to adequately funding university education in Quebec

Quebec need not go down the same ideological road to policy making as English Canada. It is quite nearly always the same plaint: low tuition = low quality university education. With the implicit or explicit always being higher tuition = high quality university education. Indeed this is the form that Lucien Bouchard’s recent pronouncement on tuition fees takes. It is reported that Mr. Bouchard opined:

“Quebec universities are dangerously underfunded compared with those in Canada and North America.…. These precarious finances have now reached a critical stage. If nothing is done, it is students themselves who will suffer first. And surely, inevitably, so will all of Quebec society.”

Pretty ominous stuff. Luckily I have had the pleasure of teaching in universities from British Columbia to Ontario and now Quebec. And luckily, or unfortunately, I was in each province both as a student and then as a professor. So I can attest to the before and after of tuition hikes (well not yet in Quebec). Here is what I observed. While the need for tuition increases was always cloaked in the garb of quality education it has rarely resulted in higher quality university education. In both the cases of British Columbia and Ontario I observed the following:

(1) There was not an increase in professorial pay beyond the CPI (although some funds were made available to attract Stars).

(2) There was not a decrease in class sizes. They either remained the same or were scaled up so that the professor to student ratio was decreased; that is, more students per professor. And this has been at all levels from the bachelors through to the Ph.D.

(3) There was not an increase in the number of tenured faculty. In fact tuition increases were accompanied by an increase in a reliance on sessional faculty. And this is directly related quality. Sessionals get paid much less than their tenured counter-parts they must therefore take on a greater teaching load to make up for the difference; often teaching at two and sometimes different universities during the same semester. How much time do you think they can spend on quality education? Couple this with the increase in class sizes and the picture is less than high definition quality.

(4) Nor did I notice an increase in expenditure on support staff. The consequence of which is that for both students and faculty the level of administrative services is approaching that of Rogers or Bell: that is one level above Kafkaesque.

Nowhere in Mr. Bouchard’s comments was there any indication of what he meant by quality of education save for some vague reference to competitiveness. My suspicion is that what he really was talking about is a move towards greater cost recovery via user fees. That is, he thinks Quebec should be moving towards full cost recovery of the expense of running universities through raising tuition fees. That this much is a standard liberal economists preference is beyond doubt. Indeed, they have been the protagonists of this position across English Canada. And I have no doubt there is a cavalcade of liberal economists earning publicly subsidised salaries ready to throw in on Mr. Bouchard’s side.

Yet that Mr. Bouchard is little confused is evident by the fact that full cost recovery is predicated on the idea that the value of a post-secondary education accrues solely to the individual student (that is education is a private good) and not at all to society in general. Oddly at the same time he wants to maintain that the underfunding of Quebec universities, owing to low tuition, will eventually cost Quebec society in general (re-read the quote above). Either education is a public good with significant benefits flowing to society from an increase in the average age of the citizenry or it is private good in which the individual student captures most or all of the benefits. Mr. Bouchard wants it to be both. This is indeed a circle that is hard to square, although Bob Rae made a valiant effort at such double speak in his commission into tuition fees in Ontario.

Let us however leave the question as to the quality of higher education and the question over its public and private goods nature to one side. Let us assume all benefits of higher education solely accrue to the individual student. Let us further concede that university thus ought to be self financing: i.e., total cost recovery. There still remains the question of how to raise the money to do this.

Mr. Bouchard’s preference is apparently for front end financing a.k.a. tuition increases. But can this position be justified within the framework of a private goods approach to higher education. Normally yes. But the problem is that in Quebec and in the English Canada university education was previously heavily subsidised by the general citizen regardless of whether or not they went to university.

Let us Assume Mr. Bouchard gets his way and the liberals raise tuition next year three fold. On what basis, that is sense of justice, should it be that those who received their university degree this year and years past not be subject to any cost recovery? That is, if I received my degree three years ago I have the benefit of a high subsidy but those graduating three years from now must absorb a much higher percentage of the cost of their higher education. Simply put, I received a benefit the next generation of students will not. There is simply no way to justify this generational inequality of treatment.

However if the cost of higher education were to be financed through higher marginal tax rates then this disparity could be fully mitigated through a general tax increase on professional incomes (say above 70,000). To simply increase tuition amounts to an inter-temporal (intergenerational) transfer of wealth. Using the progressive tax system however would ensure that those who most benefit(ed) from a university education pay a proportionate share.

This also has two added benefits. First, those students who choose to go into lower paying professional jobs like k-12 education, social services, etc., are not unduly burdened by student debt. And second that the prospect of arduous student debt does not deter those from lower income families from pursuing higher education. Well it may be true well targeted bursaries for lower income families could ameliorate this problem to some degree. However in practice the calculation of lower income is not so easily defined and when coupled with the first point the raft of bursary programs necessary to compensate is unduly complex when compared to the relatively simple instrument of progressive marginal tax rates. That Mr. Bouchard has only thought the matter through to the extent of increasing tuition rates suggests that he, like the liberal economists he appears to be taking his crib notes from, is unduly burdened by a simplistic ideology when what is really called for is a pragmatic and realistic approach to policy making.

If we take both of these points together we can conclude that the demand for higher tuition fees has little to do with higher quality post-secondary education and everything to do with cost recovery. This being the case it stands to reason that all the generations which benefited from a higher education degree should shoulder the burden and not just the future crop of university students.

Quebec need not go down the same ideological road to policy making as English Canada.

Ce qui ronge réellement Lucien Bouchard Aujourd’hui

Apparemment Lucien Bouchard était vraiment enragé du fait que Pauline Marois ait insulté Bob Gratton.

Si vous ne comprenez pas les jokes; ne dites rien.