Redistribution of Income: Policy Directions

The School of Public Policy Publications, Volume 6, Issue 23, August 2013

28 Pages Posted: 29 Nov 2017

See all articles by James B. Davies

James B. Davies

University of Western Ontario - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 29, 2013

Abstract

Poverty and rising income inequality in Canada have brought demands for improved government action on redistribution. Unfortunately, such pleas risk being overshadowed by a looming fiscal crunch as the baby boomers retire. An expanding population of seniors will add at least one percent annually to both growing health and OAS/GIS costs so that, absent meaningful change, other spending will have to be slashed by an average of 20.2 percent by 2032 if total spending and revenues are not to rise relative to GDP. For Canada’s tax-transfer system to keep fulfilling its redistributive role, a fundamental rethink is required. With non-seniors spending being squeezed, some changes in tax mix, moderate revenue increases and refined targeting of transfers will be needed to protect the system’s progressive nature. Increasing personal income tax and reducing property tax by an offsetting amount would improve redistribution without raising taxes. More revenue could be obtained without severe distortions via a capital transfer tax, the elimination of boutique credits aimed at niche beneficiaries, or perhaps a dual income tax which exacts more from labor than capital income. Improvements to existing transfer programs are another way forward. The conversion of EI to a purely insurance basis, freeing up funds to support redistribution via refundable credits is a possibility. Another cost-saver involves removing the indexation of the OAS/GIS income threshold and allowing its real value to decline, making more recipients subject to clawbacks. Whichever course governments pursue, revamping Canada’s tax-transfer system will be a delicate and difficult task. This paper explores the policy choices available, and makes it clear that time is not on our side.

Suggested Citation

Davies, James, Redistribution of Income: Policy Directions (August 29, 2013). The School of Public Policy Publications, Volume 6, Issue 23, August 2013 , Available at SSRN: https://ssrn.com/abstract=3077044

James Davies (Contact Author)

University of Western Ontario - Department of Economics ( email )

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London, Ontario N6A 5B8
Canada

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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