a fair deal

Politicians in Ottawa have been talking a lot about "fairness" lately.

Politicians in Ottawa have been talking a lot about “fairness” lately. And while Canadians complain to pollsters that their politicians lack vision, and a “fair deal” might not be as inspirational as a Franklin Roosevelt-style “New Deal,” at least it’s better than “no deal.”

Fairness is a theme that has popped up across a bunch of topics that are important, but usually only the subject of obscure public policy conferences. Now the wonks are being dragged in front of the TV lights as actual members of Parliament take an interest in things like income splitting, employment insurance reform and pension rules.

Take income splitting, for example. For many years, raising the topic at an Ottawa dinner party was a sure conversation stopper, as other guests wondered how someone from the Fraser Institute got invited to supper in the Glebe. Questions about your views on evolution would follow.

Canada has a strongly progressive income-tax system, where the rich pay much higher rates of tax.

According to Statistics Canada in 2005, the top 10 per cent of earners in Canada paid 52 per cent of the country’s total income tax.

Canada’s system is much more progressive than the United States and our definition of “rich” for the highest tax brackets includes big chunks of the middle class. The 26 per cent tax bracket starts at $76,000, a rate not much lower than the 29 per cent bracket that starts at $123,000.

This works fine for individuals, but when you think of couples it is different.

In our example above, the couple earning $50,000 each would not trigger the higher tax brackets. Both enjoy the various personal exemptions. But consider another couple where one person earns $100,000 and has one member not working to take care of the children or aging relatives, or unemployed and not eligible for employment insurance (we’ll get to that one in a minute), or doing worthy volunteer work.

Even the politician who said, “We’ll squeeze the rich until the pips squeak” probably wouldn’t consider the second couple as “rich.” And yet they pay over $5,000 more in tax, according to some estimates.

Of course, this isn’t only about tax policy. Many people oppose income splitting because it removes the tax system’s incentive for women to enter the workforce, since it usually is the man who earns the higher amount. It is also often the rich who benefit from income splitting.

However, some politicians, after decades of ignoring the topic, are beginning to sense that Canadians are more interested in the “fairness” argument. The Conservatives introduced income splitting, but only for seniors in certain circumstances. The Green Party has put income splitting at the centre of its economic platform.

Employment insurance reform is another topic which has burst onto the public agenda. A half dozen think-tanks have published studies this year and it’s been a hot topic in Parliament.

The NDP cited about $1 billion in EI enhancements as a reason for voting to support the Harper government last week (although they voted against over $3 billion in enhancements earlier in the year).

EI has been widely criticized as unfair on a number of fronts. First, Canadians pay the same rates but get very different benefits due to how qualification and benefits are tied to local unemployment. So some workers have to work around 700 hours to qualify, versus 420 hours in other regions. The result is, in 2006 for example, the Atlantic provinces had about six per cent of Canada’s workers but got about 22 per cent of the benefits. And in 2008 only about 30 per cent of the unemployed in the West received EI, while over 75 per cent did in the Atlantic region.

Self-employed Canadians often find EI unfair, especially since the failure rate of small businesses is so high. Although they don’t have to pay into it, they are also excluded from about $3 billion in parental benefits which the government funds through EI. Given how many jobs are created by small business, you can expect some politicians to try to find a solution to this problem.

There is also the issue of seasonal versus long-time workers. Workers who have paid into EI for 15 years can end up with the same benefits as those who worked only a few hundred hours, although restrictions now exist for people claiming year after year. The measures brought forward by the Conservatives and supported by the NDP and Bloc last week were aimed at boosting benefits – temporarily – for long-time contributors.

Finally, there are pensions. Recent studies show that Canadians with public sector pensions, like government officials and teachers, enjoy a massive financial advantage over the typical private-sector worker.

One Canadian pension expert compared two couples, one working in government, with the other in the private sector. All four are the same age, started work at age 28 and earned $50,000 at retirement.

The public sector couple had a pension nest egg worth $1.2 million on retirement, while the private-sector couple (assuming average RSP contributions) had only $245,000 despite working four years longer.

This issue has caught the attention of politicians too. Canadian finance ministers recently discussed this problem and commissioned various working groups, although don’t expect results any time soon.

So politicians have noticed that there are large numbers of voters who might be attracted by policies that tackle these issues. But fixing them won’t be easy. Fairness is in the eye of the beholder. The rich may grumble, but most voters rather like the idea that the rich pay most of the taxes.

And if benefits are to be raised for some groups, how will they be paid for? Will benefits for everyone else be lowered? Or will taxes go up?

So far, the government has had an easy time introducing temporary EI spending reforms and financing them with this year’s big stimulus budget. But in the future, when that deficit has to be cut, we’ll see whether these ideas stay in the mainstream or go back to the think-tanks for more seminars.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels. His latest book Game On Yukon! was just launched.