Research

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Phasing Out Supply Management: Lessons from Australia's Dairy Industry

Australia’s dairy industry has a long history of government support and control. From the 1920s to the end of the twentieth century, a succession of state and federal governments sought to stabilize the supply and price of milk, butter, and cheese and, as a result, encouraged the production of drinking milk over milk for further processing. This resulted in higher prices for consumers. After deregulation of the industry in 2000, prices for fresh milk fell and producers are now able to interpret global price signals and adjust their investment and planned output based on real-world demand, rather than face the inefficiencies, rigidity, and perverse incentives associated with government control.

A succession of agricultural policy reforms throughout the 1980s and 1990s addressed some of the issues arising from government control and subsidization, and were bolstered by Australia’s commitments to end export subsidies on accession to the World Trade Organisation in 1995. In 2000, the industry was deregulated. State Marketing Authorities, which had been responsible for setting prices and managing supply, were abolished, as was the premium paid for “market milk” produced for consumption as fresh milk. Alongside these reforms, from 2000 to 2008 the Federal Government instituted a package of measures to help producers adjust or transition out of the industry. A number of smaller farms were either consolidated or put to other productive uses.

The results of these reforms have been unambiguously positive. Consumers have benefited from lower prices for fresh milk, with prices falling by 12¢ per litre immediately following deregulation. Farmers have received consistently rising farm-gate prices, which have risen by 56% since deregulation in 2000. Fewer, larger, farms are driving greater productivity, the national milk supply has been maintained, and the size of the national dairy herd has stabilized in what is an ongoing consolidation, rather than shrinking, of an ever-more productive industry.

Dairy deregulation has enabled the Australian dairy industry to be reconfigured so producers can respond in an efficient way to supply and demand. The Australian dairy industry now exports almost half of its output, making dairy the third most important agricultural export after beef and wheat, and bringing in export earnings of about $3 billion per year. The flexibility and market orientation of the industry has positioned Australian dairy producers to take advantage of the falling tariffs in the Asia-Pacific region driven by the Comprehensive Progressive Trans-Pacific Partnership (CPTPP), and potential liberalization of UK trade policy following Brexit.

The Australian example is instructive for Canada and other major dairy-producing nations.

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The Effects on Entrepreneurship of Increasing Provincial Top Personal Income Tax Rates in Canada

Entrepreneurship is a crucial source of innovation, employment, and growth in an economy. Consequently, it is a recurring theme in many academic and policy debates. While there is no single, comprehensive measure of entrepreneurship, most studies and policymakers commonly use business entry-rate—defined as the number of new businesses as a ratio of total businesses—as a key indicator of entrepreneurship. In recent years, Canada’s federal and some provincial governments have raised their top marginal income tax rates and increased the progressivity of the personal income tax system. Since earnings from entrepreneurship, including capital gains, are subject to the personal income tax system in Canada, the recent increases in top income tax rates have also increased the country’s capital gains taxes.

Various recent government reports indicate that the Canadian business entry rate has been declining over the past three decades. This downward trend in entrepreneurship is certainly a great concern to society as business creation is often directly related to productivity and employment growth. Considering the current state of entrepreneurship, some commentators and analysts wonder whether it is possible to increase entrepreneurship and encourage more business creation through various income tax policies. What is the impact of a progressive income tax system on entrepreneurship? Is it possible to stimulate entrepreneurship through appropriate income tax policies? This paper seeks to answer these questions empirically using Canadian provincial data over a 30-year period.

Economic models show that the personal income tax system can influence entrepreneurship in many ways. According to one strand of the literature, higher income tax discourages entrepreneurship. This is because entrepreneurial activity is inherently risky, and entrepreneurs pay significant taxes on all their incomes (labour income, capital gains, or dividends) when they are successful. However, when they incur a loss, the tax savings are quite limited. Consequently, higher personal income tax can be viewed as a tax on “success” and may discourage entrepreneurial activity. On the other hand, other studies argue that entrepreneurs have relatively more tax planning opportunities and the potential tax-saving benefits increase with the income tax rate. According to some of the theoretical models that emphasize this issue, higher income tax rates can encourage entrepreneurship, even if it is not productive entrepreneurship. Ultimately, the effect of income tax on entrepreneurship is an empirical question.

Previous empirical studies have examined the relationship between income tax and various measures of entrepreneurship, but the results from these studies are mixed. To shed more light on this important issue, this paper investigates the effect of the top personal income tax rate on entrepreneurship using data from Canadian provinces over the period 1984–2015. In addition to the top income tax rate in each province, the empirical analysis controls for the various factors that are generally considered important determinants of entrepreneurship.

The empirical findings of this paper show that a higher provincial top income tax rate has a negative and statistically significant effect on entrepreneurship, both in the short- and long-term. The results indicate that an increase in the top marginal income tax rate discourages entrepreneurship as measured by the business entry rate. This suggests that raising the top income tax rate exacerbates the decline in business creation. Based on the empirical results, a one percentage-point increase in the top statutory marginal income tax rate is associated with a 0.06 percentage-point decrease in the business entry rate in the short-term, and a 0.21 decrease in the long-term. Considering the long-term results, a province that raises its top personal income tax rate by one percentage point can expect to have fewer new businesses enter its economy. That drop ranges from 14 (in the case of Prince Edward Island) to 696 (in the case of Ontario). Notably, in recent years, many provinces have raised their top personal income tax rates—Alberta raised its top rate by five percentage points, Ontario raised its top rate by 3.1 percentage points, and BC raised its top rate by 2.1 points. The federal government’s recent four percentage point hike to its top rate will only serve to exacerbate the provincial increases.

The findings in this paper suggest that these increases in top personal income tax rates have resulted in a significant loss to the Canadian economy, which has been experiencing a decline in entrepreneurship for a long time. In sum, the empirical results show that an increase in the top marginal income tax rate discourages entrepreneurship as measured by the business entry rate. This finding suggests that the adverse effect of a higher personal income tax rate on risk-taking by entrepreneurs outweighs the potential tax planning opportunities entrepreneurs may have. The study’s empirical analysis includes extensive robustness checks, which shows that in all cases, the negative effects of a higher income tax rate on entrepreneurship remain significant. The results yield an important policy implication: Canadian governments can encourage entrepreneurship with personal income tax rate cuts.

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Protecting Government from Free Trade: The “Free the Beer” Case at the Supreme Court of Canada

Main Conclusions

  • The Canadian Constitution says that Canada is an economic union. Under section 121 of the Constitution Act, 1867, goods from one province shall be freely admitted into any other.
  • The Supreme Court, in its decision in R. v. Comeau, declares otherwise. Provincial free trade, it says, cannot be allowed to impede the regulatory actions of provincial governments.
  • In R. v. Comeau, the Court upholds fines imposed upon a resident of New Brunswick for buying beer in Quebec and bringing it into New Brunswick in excess of limits under New Brunswick law. The legislation creates a monopoly for the New Brunswick Liquor Corporation for the sale of alcohol in the province.
  • Contrary to the words of section 121, the Supreme Court states that provinces are entitled to erect barriers that inhibit the flow of commerce as long as inhibiting trade is not their primary purpose.
  • The Court concludes that the primary purpose of the New Brunswick legislation is to restrict access to any liquor not sold by the New Brunswick Liquor Corporation, not just liquor from another province. Therefore, it does not offend section 121.
  • The Court expresses concern that free trade between provinces would undermine the ability of provincial governments to maintain supply management regimes, retail monopolies, and other regulatory programs.
  • To protect government regulation, the Court places the burden of proof on complainants to show that re-stricting trade is the primary purpose of any legislation that has the effect of impeding the flow of goods from province to province.
  • In preferring regulation and protectionist measures over free trade, the Court disregards both the plain meaning and historical intent of section 121 and substitutes its own vision of the proper role of government. It places aside the words of section 121 as incompatible with the functions that the Court believes the state should serve.
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Comparing the Standardized Test Scores of British Columbia’s Public and Independent Schools

Main Conclusions

  • In all six Foundation Skill Assessment exams (FSAs), non-elite independent schools had a higher five-year average score than public schools, by statistically significant amounts.
  • The largest difference on FSA exams was in Writing: non-elite independent schools scored 18.0% higher than public schools in grade 4, and 18.9% higher in grade 7.
  • On Provincial Required Exams (PREs), non-elite independent schools had a higher five-year aver-age score than public schools on four out of the five exams, by statistically significant amounts.
  • The largest difference on the PRE exams was in English 10: non-elite independent schools scored 5.4% higher than public schools.
  • After-tax income of families with students attending non-elite independent schools is nearly the same—only 1.9% higher—as that of families with students attending public schools.
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Specific Claims and the Well-Being of First Nations

In the vocabulary of Canadian Indigenous issues, “specific claims” are made by First Nations who have already adhered to treaties but believe that the Canadian government has not properly implemented their treaty or, even if they have not signed a treaty, believe that the government has violated the Indian Act in the administration of their reserve lands or trust funds. Canada has been accepting specific claims since 1974. Against a background of frequent complaints from First Nations, Canada has reorganized the claims process three times to make it faster and more remunerative to complainants, and the federal government is currently discussing further changes with the Assembly of First Nations.

There were 450 settlements up to November 15, 2017, totalling $5.7 billion (2017 dollars) in payments from the federal government. This figure does not include payments from provincial governments or the value of Crown lands transferred to First Nations as part of settlements. Approximately 400 claims are still being investigated or negotiated, and about 130 others are in some stage of litigation.

There is little statistical evidence that obtaining settlement of a specific claim makes a First Nation better off. The average Community Well-Being (CWB) index of First Nations that have received settlements is exactly the same as those who have not—59.2. The CWB of those First Nations who received earlier settlements has not grown more rapidly than the CWB of those whose settlements came later. The size of the settlement in 2017 dollars is not correlated with CWB. There is a small positive association between size of a settlement per capita and CWB, but the statistical relationship hinges on a few very large settlements and disappears when settlement size is logarithmically transformed. These results are consistent with two earlier studies that also found little or no association between specific claims settlements and improvement in CWB.

The specific claims process was originally adopted as a means for dealing with past injustices, but specific claims have turned out to be more like a flow than a stock. The process has repeatedly been made more accommodating, and legal doctrines such as fiduciary responsibility and the honour of the Crown have evolved to make success more likely. The federal government also subsidizes the preparation and negotiation of claims. These factors help explain the apparent paradox that the settlement of more and more claims has been accompanied by continual growth in the backlog of unsettled claims.

When the United States established a somewhat similar process in 1946, tribes faced a legal deadline of five years to file claims. Now in our 44th year of receiving claims, Canada should consider setting its own deadline for filing. Otherwise, the settlement of specific claims will continue to make increasing demands on the federal budget, diverting resources from programs for First Nations that would do more to enhance their future prosperity and well-being. Preoccupation with claims about past injustices does not improve future prospects, and may actually hinder progress.

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Increasing the Minimum Wage in Ontario: A Flawed Anti-Poverty Policy

Main Conclusions

  • As part of its Poverty Reduction Strategy, former Premier Kathleen Wynne’s government was planning to raise the minimum wage from $11.60 in 2017 to $15 per hour by 2019. But, raising the minimum wage is not an effective way to alleviate poverty, primarily because the policy fails to provide help targeted to families living in poverty.
  • In 2015, the latest year of available data, 90.8% of workers earning minimum wage in Ontario did not live in low income families. Though counterintuitive, it makes sense once we explore their age and family situation. In fact, most of those earning minimum wage are not the primary or sole income-earner in their family.
  • In 2017, the year before Ontario was to increase the minimum wage, 59.2% of all minimum wage earners were under the age of 25 and the vast majority of them (86.3%) lived with a parent or other relative.
  • Moreover, 17.8% of all minimum wage earners had an employed spouse. Of these, 95.7% had spouses that were either self-employed or earning more than the minimum wage. Just 2.1% of Ontario minimum wage earners were single parents with young children.
  • In addition to ineffectively targeting the working poor, raising the minimum wage also produces several unintended economic consequences to the detriment of young and inexperienced workers. These include fewer job opportunities, decreases in hours available for work, reductions in non-wage benefits, more automation, and higher consumer prices, which disproportionately hurt the working poor.
  • A work-based subsidy is a more effective policy since it better targets the benefits to those in need without these negative economic consequences.
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Report Card on British Columbia's Secondary Schools 2018

The Report Card on British Columbia’s Secondary Schools collects a variety of relevant, objective indicators of school performance into one easily accessible, public document so that all interested parties—parents, school administrators, teachers, students, and taxpayers—can analyze and compare the performance of individual schools. Parents use the Report Card’s indicator values, ratings, and rankings to compare schools when they choose an education provider for their children. Parents and school administrators use the results to identify areas of academic performance in which improvement can be made.

The Report Card helps parents choose
Where parents can choose among several schools for their children, the Report Card provides a valuable tool for making a decision. Because it makes comparisons easy, the Report Card alerts parents to those nearby schools that appear to have more effective academic programs. Parents can also determine whether schools of interest are improving over time. By first studying the Report Card, parents will be better prepared to ask relevant questions when they interview the principal and teachers at the schools under consideration.

Of course, the choice of a school should not be made solely on the basis of any one source of information. Families choosing a school for their students should seek to confirm the Report Card’s findings by visiting the school and interviewing teachers and school administrators. Parents who already have a child enrolled at the school can provide another point of view. Useful information may also be found on the web sites of the ministry of education, local school boards, and individual schools. In addition, a sound academic program should be complemented by effective programs in areas of school activity not measured by the Report Card. Nevertheless, the Report Card provides a detailed picture of each school that is not easily available elsewhere.

The Report Card facilitates school improvement
Certainly, the act of publicly rating and ranking schools attracts attention; attention can provide motivation. Schools that perform well or show consistent improvement are applauded. Poorly performing schools generate concern, as do those whose performance is deteriorating. This inevitable attention provides an incentive for all those connected with a school to focus on student results.

However, the Report Card offers more than motivation; it also offers opportunity. The Report Card includes a variety of indicators, each of which reports results for an aspect of school performance that might be improved. School administrators who are dedicated to improvement accept the Report Card as another source of opportunities for improvement.

Some schools do better than others
To improve a school, one must believe that improvement is achievable. This Report Card provides evidence about what can be accomplished. It demonstrates clearly that, even when we take into account students’ characteristics, which some believe dictate the degree of academic success that students will have in school, some schools do better than others. This finding confirms the results of research carried out in other countries. Indeed, it will come as no great surprise to experienced parents and educators that the data consistently suggest that what goes on in the schools makes a difference to academic results and that some schools make more of a difference than others.

Comparisons are at the heart of the improvement process
Comparative and historical data enable parents and school administrators to gauge their school’s effectiveness more accurately. By comparing a school’s latest results with those of earlier years, they can see if the school is improving. By comparing a school’s results with those of neighbouring schools and of schools with similar student characteristics, they can identify more successful schools and learn from them. Reference to overall provincial results places an individual school’s level of achievement in a broader context.

There is great benefit in identifying schools that are particularly effective. By studying the techniques used in schools where students are successful, less effective schools may find ways to improve. Comparisons are at the heart of improvement: making comparisons among schools is made simpler and more meaningful by the Report Card’s indicators, ratings, and rankings.

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Report Card on Alberta’s High Schools 2018

The Report Card on Alberta’s High Schools 2018 collects a variety of relevant, objective indicators of school performance into one, easily accessible public document so that anyone can analyze and compare the performance of individual schools. By doing so, the Report Card assists parents when they choose a school for their children and encourages and assists all those seeking to improve their schools.

The Report Card helps parents choose
Where parents can choose among several schools for their children, the Report Card provides a valuable tool for making a decision. Because it makescomparisons easy, the Report Card alerts parents to those nearby schools that appear to have more effective academic programs. Parents can also determine whether schools of interest are improving over time. By first studying the Report Card, parents are better prepared to ask relevant questions when they interview the principal and teachers at the schools under consideration.

Of course, the choice of a school should not be made solely on the basis of any one source of information. Families choosing a school for their students should seek more information by visiting the school and interviewing teachers and school administrators. The web sites of Alberta Education, local school districts, and individual schools can also be sources of useful information. And, a sound academic program should be complemented by effective programs in areas of school activity not measured by the Report Card. Nevertheless, the Report Card provides a detailed picture of each school that is not easily available elsewhere.

The Report Card aids school improvement
Certainly, the act of publicly rating and ranking schools attracts attention. Schools that perform well or show consistent improvement are applauded. The results of poorly performing schools and those whose performance is deteriorating generate concern. This attention, in itself, provides an incentive for all those connected with a school to redouble their efforts to improve student results. However, the Report Card offers more than just incentive: it includes a variety of indicators, each of which reports results for an aspect of school performance that might be improved. School administrators who are dedicated to improvement accept the Report Card as another source of evidence that their schools can do a better job.

Some schools do better than others
In order to improve a school, one must believe that improvement is achievable. The Report Card on Alberta’s High Schools, like all the other editions, provides evidence about what can be accomplished. It demonstrates clearly that even when we take into account factors such as the students’ family background, which some believe dictates the degree of academic success that students will have in school, some schools do better than others. This finding confirms research results from other countries. Indeed, it will come as no great surprise to experienced parents and educators that the data consistently suggest that what goes on in the schools makes a difference to student success and that some schools make more of a difference than others.

Comparisons are at the heart of the improvement process
By comparing a school’s latest results with those of earlier years, we can see if the school is improving. By comparing a school’s results with those of neighbouring schools, or of schools with similar school and student characteristics, we can identify more successful schools and learn from them. Reference to overall provincial results places an individual school’s level of achievement in a broader context.

There is great benefit in identifying schools that are particularly effective. By studying the proven techniques used in schools where students are successful, less effective schools may find ways to improve. Comparisons are at the heart of improvement and making comparisons among schools is made simpler and more meaningful by the Report Card’s indicators, ratings, and rankings.

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Summary

  • In 2018, the average Canadian family will earn $115,724 in income and pay a total of $50,464 in taxes (43.6%).
  • If the average Canadian family had to pay its total tax bill of $50,464 up front, it would have worked until June 9 to pay the total tax bill imposed on it by all three levels of government (federal, provincial, and local).
  • This means that in 2018, the average Canadian family will celebrate Tax Freedom Day on June 10.
  • Tax Freedom Day in 2018 is the same as in 2017, because the average Canadian family’s total tax bill is expected to increase at a similar rate this year (3.1%) as its income (3.3%).
  • Tax Freedom Day for each province varies according to the extent of the provincially levied tax burden. The earliest provincial Tax Freedom Day falls on May 22 in Alberta, while the latest falls on June 26 in Newfoundland & Labrador.
  • The Balanced Budget Tax Freedom Day for Canada arrives on June 17. Put differently, if governments had to increase taxes to balance their budgets instead of financing expenditures with deficits (which are deferred taxes), Tax Freedom Day would arrive 7 days later.
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Understanding the Regulatory Framework Governing Private and Public Pensions

A common argument made to expand the Canada Pension Plan (CPP) is that it is cheap to administer. While many studies have cast doubt on this claim, why would a public pension plan be cheaper to administer than a private one? Many factors affect the cost of running a pension plan, but a crucial yet overlooked factor is the regulatory landscape that private pension plan.

This paper examines the regulatory requirements among various types of public and private pension plans to determine whether private pension plans are at a cost disadvantage with respect to public ones, with a specific focus on the CPP. In short, the paper finds that the CPP—due to its characteristics and legal obligations—enjoys a marked cost advantage over other pension plans.

First, consider the legal responsibilities of the various plan administrators. Broadly speaking, private pension plans are subject to a variety of statutory and common law regulations. These require the pension plan administrators to act as fiduciaries. While the administrators of the CPP are also under these requirements, as a practical matter, the CPP is seldom entangled in any lawsuits regarding the administration and management of its assets. On the other hand, private and some public pension plans (mostly provincial) are always under threat of litigation, whether by an individual pensioner or through a class action. Although public pension plans do face litigation rarely, and usually prevail in court, the CPP is almost never sued at all. There are almost no laws allowing for private enforcement of governance laws against the administrators of the CPP, so the CPP enjoys substantial cost savings from not having to anticipate or defend against any liabilities that may arise from bad governance, something private pension plans must account for.

Private pension plans are also subject to far more disclosure and customer-related regulations; the CPP faces no such requirements. For example, anti-money laundering laws—sometimes known as “Know Your Customer” laws— affect individual pension plans, such as RRSPs and TFSAs, and any other private pension plans that engage the use of a bank or brokerage services. While a public pension plan could be engaged by such laws, there does not seem to be any focus on such plans by enforcers of these laws. A search of the CPP Investment Board’s website showed no noticeable compliance with anti-money laundering laws.

Moreover, because the CPP is a federally constituted entity (legally speaking), it is not subject to any provincial regulations. Nor is it subject to the jurisdiction of any regulations by industry organizations. As a practical matter, the CPP and its administrators carry on their business without any real consciousness of legal or regulatory sanction. Private pension plans, as well as RRSPs and TFSAs, all have to pay filing and administrative fees. The CPP pays no such fees. Private plans, depending on the province, have to constantly file reports with their provincial pension superintendent. Again, the CPP does not.

Now consider differences concerning pension plan characteristics. Private and public pension plans have multiple characteristics and options for their members. For example, there are different rules governing contribution rates for each plan, and early withdrawal triggers various consequences depending on the specific pension plan. Payouts also vary depending on whether the member retires early or waits till 65. If a member leaves their employment early, they have several choices regarding whether to take the accumulated funds or not, known as the lock-in rules. Generally speaking, even if they cannot access the pension funds accumulated, they can still transfer the funds to another plan. These possibilities create more uncertainty for the pension plan administrator. It requires more planning and safeguards, and thus costs.

In contrast, the CPP has very simple rules. Every income earner between the age of 18 and 65 contributes to the CPP at one rate per income up to an annual maximum. There is a maximum payout at retirement with some limited flexibility on which age the pensioner chooses to receive their CPP. Other than these two basic variables, the CPP rules are quite rigid, thereby simplifying the administrative costs of running the plan. There is no ability to take the accumulated funds and transfer them to another pension plan. In contrast, RRSPs and TFSAs allow for individuals to withdraw their contributions at any time (although there may be consequences for doing so). All contributions are invested by the CPP administrator in whatever funds they choose, and, unlike an RRSP, TFSA, or even some defined contribution pension plans, individual CPP contributors have no flexibility to dictate where their funds are invested. Any actuarial surplus in the CPP fund, i.e., any excesses not needed to fund current payouts, remain with the CPP and must be invested by the CPP Investment Board.

Additionally, the number of CPP contributors is large and diverse, giving the CPP a diversified set of contributors and payees. A private pension plan may have a skewed demographic in terms of its employee age profiles, which can pose its own unique challenges which the CPP does not face.

Finally, contribution rates that employees and their employers pay are set by CPP administrators and enforced by the federal government without much choice or input from employees. Private and public pension payouts are usually set by a bargaining between employers and employees, whether it is done formally in a unionized setting or whether it is done informally in a competitive marketplace. This means there is no accountability to the employees or even employers for the management of the CPP funds.