The Loot and Scooters of Global Micro-Credit

I do not know if anyone was paying attention to the development debates of the late nineties and new millennium. The mainstream went whole hog on the idea of development from below via entrepreneurializing peasantries and urban slum-dwellers.

Indeed so illuminated by the idea of petty capitalism the Nobel committee gave one of its real Noble prizes, the Peace Prize for 2006, to Prof. Muhammad Yunus & Grameen Bank.

Of course in good time capitalistas with a social conscience, like George Soros, would get behind the idea and start financing large micro-credit investment houses. Of course capitalism being what is and regulations being what they are in India it appears the whole thing is turning into a giant Ponzi scheme which is fleecing the poorest of the poor.

But here is the twist, in India politicians and state officials are not suffering from ideological capture as they are elsewhere and have told their public to stop paying their loans. The New York Times reports that in one state over 90% of people have stopped servicing their micro-loans.

Here is what I take to be money quote from the NYT on globalized micro-finance:

“The money lender lives in the community,” he said. “At least you can burn down his house. With these companies, it is loot and scoot.”

Indeed, some of the anger appears to have been fuelled by the recent initial public offering of shares by SKS Microfinance, India’s largest for-profit microlender, backed by famous investors like George Soros and Vinod Khosla, a co-founder of Sun Microsystems.

Notice that the “he” in the above quote is a senior public official with the State government. Burning down the house of the money lender as a form of implicit social regulation. What a novel idea.

Getting radical about Canadian debt levels and servicing facilities: Let Canadians tap on the window of the Bank of Canada

There has been some considerable ink spilled over Canadian consumer debt to income ratios (I am not providing the links; that is why god invented google). I am one of these rare (in the aggregate but not rare) Canadians which has a debt to income ration of around 70%. The down side, for both me and my creditors, is that none of it is secured. So I made an appointment with a bank representative to see if there was some way to consolidate all the different unsecured debt into a nice little package with a fixed (low) interest rate and fixed payment schedule with the agreement that I would cancel all but my banks credit card which is unencumbered. The answer was yes it is possible but the interest rate is going tobe on average higher than the different rates on all my debt. About half my debt is at 5.5% the other half at 10% and the consolidation loan was the high end of 9%. All this, in an environment in which the central bank rate is 1%.

That is an 8% spread. If the government really wants to get debt to income ratios down and does not want serious deleterious effects on aggregate demand then it should empower the BOC to offer consolidation loans at 1.5% with the proviso that they are structured over a maximum of 5 years and no consumer credit lines can be taken up by the borrower for the term of the consolidation loan. Further, to back stop against the plaint that these are unsecured, the legislation can be past that effectively secures them. Here is how: take them out of bankruptcy provisions and empower revenue Canada to pursue payments via forfeiture of all tax credits until the balance is paid in full.

So what is the benefit to Canadians? The ability to individually deleverage without killing aggregate demand. This of course is far too pragmatic so it has no chance between two hockey sticks an E and two Ls of getting traction. But it does suggest that there are still some non-revolutionary options left on the table .

Of course we could always just wait for bankruptcy provisions to solve the problem and or a long protracted period of reduced aggregate domestic demand.

Cutting through bullshit with a particle beam

Sometimes trolling through the comments section on other blogs is a pleasure. Especially so when it is a blog (and the only blog) I have been banned from. From time to time you read a comment that is so apt, such an elegant summary of the real matter at hand, that you just can’t help but say to yourself, through a tear stained laughter, damn that is spot on. So without further introduction here is said commentary lifted from the comments section over at WCI:

Greg Mankiw compares the current tax system to a hypothetical zero tax system.

To make it a fair comparison, one should wonder what would be the working opportunities for M. Mankiw in a state of total anarchy without any public infrastructure, police, public education, public health agency,…
My best guest is that M. Mankiw would be a peasant giving a part of his crop to the local warlord for protection…

Posted by: Mercure | October 12, 2010 at 08:33 PM

Sounds about right.

Greg Mankiw turns down Riksbank Prize: Says he does not like the tax implications

Well no it was actually never offered to that scribbler of text books but if we follow the logic of what Mankiw was arguing in his opinion piece in the New York Times he never actually tried to win the prize because his taxes might become too high. Sad really that the idea of letting the Bush II tax cuts expire for the very wealthy has deprived the world and Mankiw of the Sveriges Riksbank Prize in Economic Sciences.

Mankiw also warns in his obit for meritocracy that it is not just the national glow from his prize that Americans will have to forgo if they let the Bush II tax cuts expire they will also have to forgo Rocky XI, Transformers IV, the next Wayne Gretzky, and all the good things mediocre people like to watch, listen to or have done to them.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives…..And, to be sure, the looming budget deficits require hard choices about spending and taxes. But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.

Sad really that silly socialists think they can tax the rich=talented and the poor=mediocre won’t suffer.

Excuse me I have to go vomit now and do some more genuine reading say of press releases by the American Mortgage Bankers Association on how they are just trying serve the American people.

I think it is just wonderful that in the pursuit of science so many economists spend such a disproportionate amount of their time conjuring up convoluted reasons why you can’t tax the rich or if you do tax the rich how they will then pass along the misery to their lessers in one form or another. The irony of course is that they inadvertently make the Revolutionary Marxist argument for outright appropriation as reform is futile.

My Dad, Me and Paul Krugman

So I calls my pops this evening (well evening for me and afternoon for him) and we get to chatting about politics in general and specifically about economic policy. Being originally from the US and being a well read individual he routinely reads Paul’s op eds in the New York times.

I stopped calling my dad for awhile because the cell phone long distance rates were high and we always wasted 30 minutes on Krugman. To be honest Krugman pisses me off more than he pisses me on (if that makes any sense) and the notion that I should spend 60 cents a minute talking about the man every time I called my dad is untenable (18$!!). And there was no way out of it because my dad also subscribes to the New York Review of our Friends Books. Incidentally, and on that last point, for a couple of Christmases my dad bought me a subscription to the NYRB in which I was to be grateful for a constant drip of Paul’s POV. When I finally got a job one of the first things I told my dad is please do not buy me another sub to the NYRB I have departmental funds and can buy a sub. I did not.

Nonetheless because of Paul’s gig with the NYT I am constantly preparing for another go around, at 60 cents a minute, on the greatness and weakness of Paul Krugman. Don’t get me wrong Paul seems cool enough and he would have fit right in around the family dinner table with his toxic brand of optimism and cynically naive take on the world.

Tonight was interesting in the above regards. I called my dad and inevitably the conversation turned to Krugman. Actually I initiated it and I think it started with the mild preface WINTHFHISGOWTFDBPK. I thought it was a harsh but fair opening position to take. My dad demanded WITFHRUTA? I responded how long can he lean on the same saw: they won’t listen to me, they won’t hire me, I have no voice, I am peripheral to the conversation. To which I continued if he would just ask the question why.

Then my pops responds but he has and it is a disgrace. It is a though he thinks that people in positions of power are just suckers or slaves to conventional wisdom.

Like a …you fill in the simile. Precisely I says. It is like a conversation with an old school Marxist who rebuffs every question about a query over the dis-juncture between the revolutionary interests of the working class and their actual choices with a demure to false conciousness.

My dad responds it is like PK thinks there is no material reason for the elites to think as they do, they are merely sheep being herded by conventional wisdom.

Then the conversation then broke into some esoteric conversation over fallacies of composition and rationality at the level of the individual owner of capital and the consequences of deriving policy there from. Which is PK’s point. Save for the incredibly obvious point that what the individual capitalist now knows (those that count in national accounts) is that the state will, when necessary, rob from the relatively poor to backstop the rich so they really do not have to care about aggregation errors.

My dad is a smart guy!

Krugman looses it and losses it bad: Maybe economics is a morality play

Krugman is precisely what is wrong with American progressives. He thinks after spending a life watching while nobody left of him was left standing; that after mission accomplished, he would be benighted. The reality is that he has been rendered superfluous. The War is over kid and you were used like a peon.

Like Stiglitz, Paul reminds of a good reform liberal who, after coming back from the crusades, realizes that the war he thought he was fighting was not the war he was actually fighting. That hit home for Stiglitz circa his tour at the world bank. Old Joe has never really recovered. Something opened his eyes at the world bank and suddenly almost all the little tightly written mechanical equations he ever employed seemed to evaporate into thin air.

Earth to planet Paul there is a reason Larry gets the plumbs. Hint: and it is not because he is a better economist than you. Larry understands something your naiveté never will. Economic laws are made by Humans (for Larry men) the rest is commentary. Larry does not speak truth to power so much as he cloisters it in shiny white garb serving up technocratic, but nonetheless, ideological resources ready to hand for power. If Larry gets annoyed sometimes maybe it is not because of principle, maybe it is because he thinks the powers he serves are too deft to their own interests. And that really was the conceit of Keynes.

You behave as you believe: public policy is for the betterment of human kind. Here is what is going to happen Paul; 8-10 years from now you will be proven right and nobody will care. Whatever the configuration of economic and political forces at that time will be they will not give one shit about your sage like prevision.

In short, you will be equally as superfluous as you are now. Here is a clue Paul. Keynes, your hero, was in a very interesting milieu with socialists and communists to his ascendant left and self serving, myopic, reactionary forces to his right. Keynes could under these conditions position himself in the centre: You can’t. Your left flank has long since been burnt.

Sorry my dear comrade you are now the indefensible poll-bearer of the left. So please stop Kvetching and pony-up.

Apostle Paul writes:

The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.

Gee Paul and why might that be? Why might capitalists prefer fascism and war to useful things? The answer to that question is where the morality play of economics leaves-off and objective political economy begins.

The Limits to the NDPs War on Consumption Taxes: and the Crisis on the Left

Usually the NDP frames their stance against the Harmonized Sales Tax as not being one of anti-tax but one of being anti-regressive taxation. This is a view I am sympathetic to. However, some real-politic concerns have slowly started to change my mind. I say slowly because back in Grad School I was willingly to put up with a never ending series of accusations that I was a petite bourgeois tax renegade by no less than my supervisor and 8 years later I have not been fully convinced. But let me indicate the three most important arguments that have been moving my mind however glacially on the subject.

My graduate supervisor’s point, and one which I was sympathetic to, but just not enough to bring me around on the issue was about the tax base. His argument was that as long as progressive income taxes were in the political firing line progressives would need to fight to keep the tax base and that meant consumption taxes. Indeed Swedish social democrats used largely this strategy to maintain funding for a high quality and efficient social democratic welfare state. Note: Sweden has both higher income taxes and higher consumption taxes than Canada.

The second argument which has started to move me around on this issue is over the question of broader political strategy. Just how will the Carole James NDP in BC, if it were to gain office, manage to raise taxes of any form after having thrown the party’s lot in with what can only be described as Vander Zalm’s petty populist tax revolt? By ranging themselves against consumption taxes does the NDP really think that to the median voter that is a green light to raise their income taxes? So whatever the truth of the NDP’s position against regressive taxation it does not mean they are going to get progressive taxation. I dare Carole James to make increased progressive income taxes the centre piece of the next campaign. Simply put the discursive consequences of being against regressive taxes probably are equivalent to being against taxation in general. In my mind this is the strongest argument against the NDPs war on consumption taxes.

The third argument is the Pigou argument. Simply stated economic activities involving demonstrable negative public externalities ought to be taxed. Tax what you don’t want and redistribute to what you do want. In principle I get the logic here, where it breaks down is getting a political consensus on what we do want and don’t want.

The reality is that there is simply a massive public aversion to higher taxes of any form and there does not seem to be strong consensus on redistribution. So even when we can find an example of where a government has been able to increase regressive taxes there has been only tepid nod to redistribution. Exhibit A would be the last budget in Quebec.

There is a good article, Fueling the Tax Revolt: What’s Wrong with the NDP’s Anti-HST Campaign by Matt Fodor, in The Bullet on all of this including the NDPs various predicaments. I will quote at length the conclusion:

Ironically, the U.S. and Canada in fact have more progressive tax systems than Denmark and Sweden. Taxation rates are higher in the Scandinavian countries at all income levels. Thus the highest earners pay a higher level of income tax, but so does the working class – the ratio between the top bracket and what an average worker pays is smaller in Scandinavia. In 2004, the combined level of personal income taxation and social security contributions for an average production worker was 24.1% in the U.S. and 25.1% in Canada – compared to 33.7% in Sweden. And the average production worker in Denmark (44.1%), along with Germany (44.5%), paid the highest among OECD countries.

All countries use taxes and transfers to counter inequality, but the Nordic social democracies mainly rely on transfers. Transfers as well as taxation, have a role to play in terms of reducing inequality. In a paper for the Ontario Fair Tax Commission – which was established by the Ontario NDP government as a means of exploring tax reform – Lars Osberg stressed that transfers must also be taken into account when one speaks of progressivity:

“In practice, the tax and transfer systems are inevitably closely linked – indeed, it can be argued that transfer payments are ‘negative taxes.’ The net impact of taxes and transfers on individuals is the difference between payments made to and payments received from government. This net impact is relevant for equity purposes. Although some tax choices (such as a value-added tax) may be regressive, taking a higher percentage of the income of the relatively poor, the tax/transfer system as a whole may be progressive, if expenditures benefit primarily the less affluent (as in Sweden).”[11]

It should be stressed that progressive taxation must remain on the agenda for the Left, and that the shift away from progressive taxation (including in Scandinavia) over the past two decades remains a concern. In Canada, the case for far more progressive taxation remains especially compelling. Jackson points out that the income gains of the 1990s went disproportionately to the wealthiest 10 per cent of Canadian families – and these income gains were more pronounced the further up the income ladder. And while the effective income tax rate for most Canadian taxpayers declined only slightly, it declined much more sharply for the very wealthy. The phenomenon of rising incomes at the top, Jackson observes, can only be effectively countered by progressive taxation:

“Canada needs to pay much more attention to income tax progressivity given the steep increase in top incomes, which is now the key driving force of rising income inequality in Canada and other ‘neoliberal’ advanced capitalist countries. Transfers counter inequality by raising the lower end of the income distribution, compared to the middle and the top, while progressive income taxes counter inequality mainly between the top and the middle and the bottom of the distribution. If inequality is now being largely driven by the growth of the income share of the very top, progressive income taxes must play a larger role in our redistributive policy arsenal.”[12]

In spite of the NDP’s denunciation of the ‘regressive’ HST for taxing ‘ordinary Canadians’ rather than corporations and the wealthy, it has failed to put progressive taxation back on the agenda. Besides symbolic gestures opposing the latest round of tax cuts by Liberal and Conservative governments, the NDP has been unwilling to call for increased income taxes for those with the highest incomes. By failing to do so, claims that the party is not “anti-tax” just “anti-regressive tax” ring hollow. The declining progressivity of the Canadian tax system remains a core concern, and an issue that certainly should be taken up by the NDP. However, the key lesson of Nordic social democracy – that a well-financed welfare state necessitates the use of consumption taxes and other so-called “regressive” taxes – remains essential.

There in fact is a compelling case for consumption taxes on socialist and ecological grounds. Social democrats, include those in Scandinavia, have been rightly criticized for pursuing ‘shared austerity’ policies that redistribute income within the working class/middle class while having abandoned policies that target capital. That being said, socialists ought to defend policies that redistribute income from higher-income workers to low-income and unwaged workers on solidaristic grounds. As the Nordic social democracies have shown, this is done through sales and turnover taxes. There is also a ‘public goods’ argument. The taxation of private consumption can fund the provision of public goods (such as parks, public transit, public housing, etc.) that are more ecological than private goods. Furthermore, public goods provision has the effect of decommodification which is as important as progressive taxation in terms of moving toward socialist relations in capitalist societies.

The global economic crisis has resulted in a hard-neoliberal turn toward fiscal austerity and public sector wage restraint and cutbacks. Such an anti-austerity campaign necessitates at the minimum reversal of the Harper government’s cutting of the GST from 7 per cent to 5 per cent, a move that was opposed by the NDP but goes against the spirit of the anti-HST campaign. As Mel Hurtig observes, Canada already ranked number 27 out of 30 OECD countries in terms of taxation of goods and services in 2003. While “someone buying expensive jewellery or new Bentley will save a bundle…a 1 or 2 per cent saving on even inexpensive household items represents only pennies. Yes, pennies to a poor person are important, but 2 per cent of the cost of a million-dollar house could pay for a big pile of groceries for many poor families.”[13]

The GST cut costs the national treasury billions of dollars per year. The restoration of the GST to 7 per cent alone would significantly offset the cuts to the public sector. Further increases to the tax are essential components to the improvement and expansion of public services. Transfers to low-income households could be significantly increased as well.[14]

The building of an anti-austerity campaign that makes the case in support of expanded public services is not likely to come from the NDP leadership, given its opportunistic stoking of anti-tax politics on behalf of so-called “working families,” as well as its muted opposition to current attacks on public sector unions. It is a matter of some urgency to re-imagine what a new anti-neoliberal alliance will look like in Canada. The union movement in Canada is, for the most part, providing almost as little leadership in social struggles. Public sector unions in alliance with users of public services ought to take up the leadership here, but they will only be pushed to do so to the extent a new left begins to emerge inside the wider union movement. But it could be argued that private sector unions and social movements – anti-poverty, feminist, environmental, and other organizations – are in an even worse state of disorganization. This speaks – like the debate over the HST as a whole – to the wider crisis of the left in Canada. An anti-austerity campaign needs to be equal parts a fight against neoliberalism and building a new left. •

Are Canadian Economists as Smart as Paul Krugman thinks?

Unfortunately Krugman’s hopes that the policy conversation in Canada is more enlightened than in the US is dashed once again. Here is the set-up which is lifted from the comments section over at WCI*:

Posted by: [JR] | September 10, 2010 at 06:44 PM

The problem with central banks just targeting inflation is that no-one is responsible for unemployment. The ethically critical task for economists is to figure out how to get the NAIRU down.

Posted by: Stephen Gordon | September 10, 2010 at 06:58 PM

Are you sure? Because there’s a really cheap and easy way to do that: abolish Employment Insurance and social assistance. Be careful of what you wish for.

OK lets leave JR’s confusion over the unemployment rate and the NAIRU to the side as even US senators botch it badly. Let us also leave the dubious scientific validity of the NAIRU to one side (the empirics are bad). Let us also refrain from mentioning that he sounds a lot like the shrill Niels Veldhuis of the Fraser Institute which Stephen has decried as not belonging to the evidence based community.

Stephen’s flippant response (and in perfect accord with the Fraser institute) is I suspect the widely held gut instinct of scientific liberals** (aka orthodox economists). But I think even here Stephen has transgressed the boundaries of the received wisdom and is attempting to push the argument further than can be sustained on its own terms–i.e. accepting the internal validity of its logic.

The supposed link between welfare, EI and the NAIRU is that IF replacement rates (the benefit paid out) are too high then unemployment will stay too high because workers will not accept jobs below their replacement rates. That is the micro mechanism. The macro-consequence is that prices (wages) will not stall or fall because the economy is already at a de-facto full employment rate. If replacement rates are left untouched and the government tries via fiscal policy or the central bank tries via monetary policy to stimulate the economy in an attempt to decrease the ‘”officially recorded” unemployment rate THEN they would simply increase inflation (and at an accelerating rate to boot if they kept stimulating) because they would essentially be stimulating a supply constrained economy (on the labour market side).

The NAIRU can thus be thought of as the Phantom Menace in this morality play: in which the abridged moral of the story, as is often the case, boils down to a cliché–the road to hell is paved with good intentions–trussed up in quasi-scientific garb (hey if the relationship is not stable and it fluctuates without major changes in the social protection legislation and despite increasing labour market flexibility then I am being REALLY charitable here).

I slightly digress. Let us come back to causation and replacement rates. The average welfare rate in Ontario is around 600$ and the average minimum wage job pays around, after taxes and deductions, 1100$ (assuming a 35hour work week). Which means that the replacement rate for welfare is about 55%, or near half the value of a minimum wage job. Employment insurance replacement rates are an equally dismal 55%.

There are thus two major flaws in Stephens extreme logic that “there’s a really cheap and easy way to do that [lower the NAIRU]: abolish Employment Insurance and social assistance.”

The micro foundations of the NAIRU rely on the relationship between the incentive to work and the incentive to idle. True, all things being equal if I could collect something close to my existing salary without actually having to work I would probably dedicate most of my time to strictly speaking over the short term non pecuniary pursuits. We might call it leisure or we might call it investment the proof of the pudding would be in the eating. That is another story. The point is 55% of my salary leaves me and I suspect most Canadians declaring bankruptcy if sustained for too long a time. The replacement rates are already so low as to make me willing to take any job at anything above 60% of my existing salary with the hopes of shopping-up when times get better. That implies massive flexibility which implies a hefty downward shift in the NAIRU.

Here is the analogue. Imagine the Bank of Canada is sets real interest rate at 0% (O.K. you do not need to imagine they are already there and have been for some time; negative in fact). So you are pushing on a string: your are out of ammo. Replacement rates work the same way. Once they have been pushed so low any further decreases deliver infinitesimally less effect on the NAIRU. Stephen forgets his ilk already won that war. But like a good soldier fighting the last war he needs to ring the bell again!

Fine, old wars and instincts die hard.

But here is the really shrill part of Stephens logic. Abolishing EI and welfare would not lower the NAIRU under present conditions. We are demand constrained. We only become supply constrained on the labour supply side of things if and only if according to accepted wisdom if high unemployment persists for too long: i.e., hysteresis kicks in (you know the idea that Wayne Gretzky forgets how to pass and shoot hockey pucks after a year).

Yep I am willing to swallow all that bullshit and I still can’t get to Gordon. Hey it is an inside job I am pulling here.

Re-focussed. If you killed EI and social assistance right now, the consequences would be devastating. Demand would plummet by the equivalent value of payments, business would register the defective demand through declining inventories and decreased investment and prices would begin a deflationary death dance. True the NAIRU would be heading south: -4 or 6%% anybody? BUT so what? The recorded unemployment rate would go to 14-20% and if we accept that skills are like lettuce those figures would become persistent and the tax base totally eroded. Now if Stephen Gordon thinks that is a cheap solution to the NAIRU then I can only conclude that he has joined the ranks of the, what was the phrase he used?, ohh yes: “not belonging to the evidence based community”

*The name of the innocent was changed to protect the innocent.
**Take a political theory course if you do not know what a liberal in the political theory or original sense of the word means.

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.