My public writing took a bit of a hit in late 2014. Between DEEP, the campaign and a determined push to put together a first draft of my PhD, there weren’t enough work hours left to do much writing. Not much has changed right now but there are a slew of topics that (I think) warrant discussion, in particular changes to Canada’s immigration system, declining oil prices, and what a real middle class economic plan looks like. That said, I’ll start the year with something I’ve been thinking about for about two years now. Tax Free Savings Accounts (TFSAs).
My interest is two-fold. First, assuming part of the TFSA’s purpose is to help increase savings amongst low-income Canadians (traditional non-savers), is the TFSA an effective means of increasing this? And second, dependent somewhat on that outcome, does it actually perpetuate growing inequality given the benefits the TFSA offers to people with wealth over those dependent on income (see Thomas Piketty’s work for example).
In theory TFSA’s are a gift to savers from all income brackets as they allow you to accumulate capital gains tax free. Introduced in 2009 with a contribution ceiling of $5,000 per year, the Conservatives promised in 2011 to double that ceiling to $10,000 per year once the budget was balanced. I’ve had several people comment to me that they’re looking forward to that move, and from a strictly individual/rational point of view, why wouldn’t they. They already save, and this will allow them to earn more on their savings. Rational, logical, check.
However from a policy perspective, in particular one that is more concerned about making sure that we let as many people as possible on the economic ladder, I’ve always wondered whether the TFSA actually made sense as an incentive for people who struggle to save in the first place. This is an important question to ask, IMO, as given the impact on tax revenues (eventually upwards of $10 billion if the ceiling is doubled and contributions maxed out according to UBC prof Kevin Milligan), we’re really facing a choice between policy levers (assuming we’re somewhat progressive and want to help those who struggle to save in the first place).
Others have asked the same/similar questions. In a 2012 edition of the Canadian Tax Journal, Maureen Donnelly and Allister Young look at the UK’s Individual Savings Account (ISA), broadly similar to the TFSA, to see what impact it has had for low-income earners. A decades worth of data from the UK highlights that the ISA has not in fact made a significant impact on the savings behavior of low-income individuals or households. The authors note in fact that “The introduction of ISAs has done little, if anything, to break down the barriers to saving faced by low-income individuals The authors also find that the ISAs, over time, are used increasingly by high-income individuals/families, and are used as a means of transferring income from high-income earning spouses to low-income ones.
At the time of the TFSAs introduction in Canada, analysis by then RBC Chief Economist Paul Ferley and his colleague Derek Holt argued that TSFAs were likely to be used by middle- and upper-income earners, not by lower-income earners. They also noted that it wasn’t certain that we’d actually see increased savings, rather instead we’d see transfers of existing savings into this new tax-free vehicle.
So, have these two scenarios happened? It’s actually quite difficult to tell.
On one hand, participation by those with incomes over $80,000 is approximately double that for those under that threshold. And participation, as expected, decreases significantly as income decreases. And even these levels of participation should come with a rather large asterisk given that about 30% of all TFSA accounts have never received a contribution. It’s a rather safe assumption that a good chunk of those 3.4 million empty accounts are on the low-income side of the ledger.
As for actual contributions, here it’s even harder to see what is happening. In 2013 the Ministry of Finance released some information as part of its annual Tax Expenditures Report as a “Profile of TFSA Account holders”.
The data shows that approximately 50% of total contributions in 2011 were made by those earning less than $50,000. (Note that I’ve eyeballed this as they don’t actually give you the data…..) Based on the participation rates provided, this would work out to an average contribution of approximately $3,000 per account holder. That’s a lot higher than I would have anticipated. Unfortunately there’s no breakdown of average contributions per income bracket, nor is there any analysis provided as to whether this is new savings or the transfer of existing savings into this new tax-free vehicle.
I find the omission of those two points quite strange. If you were going to defend/advocate for this type of policy, and claim that it helped low-income earners, those are probably the first two data points you’d assume someone would ask for. That they haven’t makes me think they don’t look good.
What we do see in this release is that high-income Canadians use the TFSA aggressively and are far more likely to max it out. They’re rational, logical people so good for them.
But if all of this is premised on wanting to help low-income Canadians save for a rainy day, then, given the data I can find, I’m far from convinced that this is the most effective way to do it. And this shouldn’t surprise anyone. Unless we target the roots of low savings rates, i.e. low incomes and less disposable cash, then we won’t actually make a dent in the percentage of those able to participate in such savings schemes. And if we’re concerned about inequality then this is pretty much the opposite of what we should be doing to address it.
What could we do instead of doubling the TFSA ceiling?
First, cut income taxes for low-income earners/raise the personal credit. This would put more money in the hands/wallets of those who currently need it most. Do it. Do it now. It helps low-income individuals, young adults, single parents, etc etc. Do it.
Second, accompany that cut in income taxes with a matched savings programs for low-income households/individuals. Here’s an example. As it stands, the Basic Canada Education Savings Grant (RESP) sees parents get upwards of a 20% match from the government for investment in their children’s education. Low-income parents can get an additional 10-20% on the first $500. Why not increase the value of the government match on the RESP for low-income Canadians? And why not offer similar matching schemes for individuals who want to save for further education/reskilling/retraining? Of if the worry is savings for retirement, why not simply provide a match for low-income savings for specific use post-specific age (…CPP…)? I’m sure others have better ideas.
Ultimately, the TFSA is great if you have cash to spare. But in a society where far too many have a very different and very real problem involving having too little cash to save, our policy focus should be on helping them. Given the data I have seen, the TFSA doesn’t do an effective job of this given the amount of money spent on the program. There are other, far more effective ways of increasing savings amongst low-income Canadians.
I’ve had a couple of questions today about a visit from Chris Alexander, the minister of citizenship and immigration, and his announcement of an improved visa process for foreign entrepreneurs. See story here.
One individual queried why we’d support foreigners and not just our own entrepreneurs. Now I have an evident political bias against the current governing party but I won’t let cloud my policy lens. The answer is that the startup visa, or other programs like it, are good policy, and help create the grounds for significant domestic employment growth.
There’s a wealth of research that highlights the immense contributions made by immigrants to technology or other research and development intensive sectors. The best work I’ve seen was done by Vivek Wadhwa and Annalee Saxenian (and others).
They looked at a sample of 11,000 venture-backed companies in the United States over the period 1990 to 2005. The authors found that 25% of them had at least one immigrant as a key founder of the company. And the impacts of these immigrant-founded companies on the broader American economy is immense, contributing over $52 billion in 2005 sales and creating nearly 450,000 jobs. A subsequent National Foundation for American Policy analysis of the top 50 venture-capital-backed companies in 2011 shows that nearly half of those 50 firms were founded or co-founded by immigrants.
Here in Canada I’ve yet to see similarly rich data, however Industry Canada has a series of papers that looks at the contributions of new Canadians. They find a higher propensity towards entrepreneurship than the Canadian average, and a significantly higher rate of investment into R&D amongst those immigrant-founder and majority-owned businesses. Moreover, immigrant-founded businesses are nearly twice as likely to export their product than other Canadian firms.
Given the link between exporting and investment in technology or research as a driver for high-growth, promoting these firms is very good policy. Finding a way to bring the best and brightest to Canada to start their entrepreneurial ventures is similarly good policy. These programs bring innovative ideas and jobs to Canadians, new and old. If someone tells you otherwise, ask for some data to back it up.
Published in the Waterloo Record, July 18, 2014: http://www.therecord.com/opinion-story/4636423-entrepreneurial-support-key-to-canada-s-future
Co-authored with Anthony D. Williams
Last Friday’s Canadian jobs report highlights ongoing sluggishness in the Canadian economy and continued concerns about where employment and economic growth will come from in the future. And new research by the Waterloo-based Centre for Digital Entrepreneurship and Economic Performance (a think tank we co-founded in 2012) suggests that while Canada has a strong pool of globally-competitive multinationals, our economy lacks the economic diversity required to support broad-based job creation and prosperity across the country.
We spent most of the past year analyzing Canada’s population of billion-dollar firms. We looked at how this population of Canada’s largest companies has changed over the past decade. And we quantified how much these firms contribute to Canadian employment and innovation.
The results tell us a great deal about the recent transformation in Canada’s economy and what policymakers and business leaders need to do make sure Canadian firms remain competitive in a global economy.
Our study evaluated 169 publicly traded firms with revenues of over CAD $1 billion. Together they employ nearly 1.4 million Canadians. Looking at the period 2003-2012, our study finds that employment in Canada’s largest firms has grown most strongly in resource, service and engineering and construction sectors. In fact, Canada’s strength in natural resources means it has done well, and even exceeded some of its peers (Germany, the US and the UK, for example) in producing billion dollar firms on a per capita basis. If there is a risk, it’s that the majority of growth in large firms is concentrated in one sector and one province (you guessed it, the energy sector in Alberta). Whether this is a good thing or not is up for debate. What’s clear is that given the sectors’ environmental impacts, a more nuanced approach would meld Canada’s entrepreneurial ecosystem with technological solutions to those environmental challenges.
Beyond resources, our research also uncovered many encouraging signs that Canadian firms are gearing up to compete on the international stage. For example, we found that leading Canadian firms are more globally engaged than ever, and this global engagement is a significant factor underpinning their growth—both over the past decade and into the future. Canada’s most successful firms generally point to their internationalization as a necessary step given the relatively small size of Canada’s domestic market and the significant opportunities for growth elsewhere.
There are certainly risks associated with this external gaze. Our research shows that international growth often means more emphasis on hiring overseas, and potentially less Canadian employment, particularly as internationalizing firms make strategic decisions to locate their operations closest to the largest centres of global demand. However, our data shows that despite their growing international footprint, domestic employment gains in Canada’s billion dollar firms are double the national average.
Our conversations with executives at Canada’s largest firms make it abundantly clear that there is no room for complacency. Executives recognize that they must invest more in technology to reach new levels of efficiency. They must step up their acquisitions of high-potential companies and get access to the best talent, wherever it may be found in the world.
At the same time, our research also shows that governments at all levels can play significant role in helping younger firms climb on the ladder to fast-growth so that we continue to enlarge the ranks of globally-competitive firms.
Today, just 4.7 percent of all Canadian firms account for 50 percent of Canadian job growth. Finding ways to enlarge this pool of high-growth companies and better support existing ones should be task number one. In particular we need to find ways to boost the number of high-growth firms in sectors that are poised for growth like health care, clean air, clean water and education, all of which will benefit from a growing global middle class that demands such quality of life services and that will build on core Canadian competencies.
How can this be done? The public and private sectors need to collaborate to provide stronger support systems for entrepreneurs that can facilitate the evolution of their companies from start-ups to global enterprises that create significant employment and support large-scale investments in innovation. Among other things, this means better access to the supply chains of anchor customers (like government or large firms in Canada), more expansive mentoring systems to connect new entrepreneurs to experienced business executives, more robust linkages between start-ups and university research centres and export development support to ensure that start-ups can access global markets and bring jobs back home.
Canadian entrepreneurs interviewed by the DEEP Centre also called for more investment in branding Canada as a destination for investment in entrepreneurial ventures, greater inclusion of start-ups in international trade missions, more assistance in competing for the best talent, and streamlined access to research and development support from the government.
All together, this spells out that Canada needs a national competitiveness and innovation strategy that builds new clusters of capability around some of the emerging growth sectors identified above; clusters for green technology, health care services, digital education and more. Kitchener-Waterloo’s world-class technology cluster provides the rest of the country with a great example of how to start.
Anthony D. Williams and Dan Herman are the co-founders of the Waterloo-based Centre for Digital Entrepreneurship and Economic Performance. The DEEP Centre’s report on “Canada’s Billion Dollar Firms: Contributions, Challenges and Opportunities,” is the product of a partnership between the Business Development Bank of Canada, the Canadian Digital Media Network, Export Development Canada and Industry Canada. The study is available for public download at www.deepcentre.com.
Bill anything but fair
Published in the Waterloo Record, Friday April 11, 2014: http://www.therecord.com/opinion-story/4457955-bill-anything-but-fair/
Bill C-23, the so-called Fair Elections Act, is an affront to Canadian democracy and needs to go.
Those are strong words, but I write them with no hesitation, given the bill would disenfranchise thousands of Canadians. Students, seniors, First Nations and some persons with disabilities, in particular, will all face significant hurdles as a result of this proposed legislation.
This, despite the fact that as testimony in committee has noted, there is no evidence voter fraud has taken place under the current system.
Stephen Harper’s government is also working to muzzle Elections Canada and undermine the agency’s independence. In light of the numerous cases of misconduct uncovered by Elections Canada, notably by the governing Conservative party, the government’s hostility to independent oversight is not surprising.
However, just because we’ve grown accustomed to this type of ideological attack by the Conservatives, it doesn’t mean we shouldn’t speak out loudly against it.
The Fair Elections Act will fundamentally undermine Canada’s electoral system. While it’s understandable that politics will see disagreement on many issues, Canadians of all beliefs and political affiliations should be united in asserting that Canada’s democratic institutions be free from political interference.
We need to demand the Conservative government change course. Rather than attack voter participation, we should be working to engage more Canadians in the politics and policy that shape this country’s future.
We have more tools, both online and offline, than ever to do so, so let’s get to work on making those in power listen.
As a relatively new father, one whose son just entered daycare, I’ve quickly learned that the early childhood educators (ECEs) who care for my son are some of the most important people in my life. Every day he returns home with new words and new skills, benefits that help moderate the stress that the cost of this service brings. As I’ve quickly learned, sending my son to a registered daycare centre here in Waterloo costs the equivalent of small car and far more than a year of university tuition.
It’s an investment, right?
Well, if so, we might want to revisit how we fund daycare in Ontario and across the country.
Having just returned from a couple of days in Montreal, I was struck by the loud debate currently taking place related to the Quebec government’s decision to raise the daily cost of its subsidized daycare program… from $7 to $9 a day by 2016. Compare this to my $40/day payment here in Waterloo and the difference couldn’t be more stark. And while my wife and I are fortunate enough to be able to cover these costs, many are not.
Thankfully the Region of Waterloo provides subsidies to cover a significant share of the cost for 2,800 local children. However, as this year’s regional budget process highlighted, without a long-term commitment from either the provincial or federal government, such support is not guaranteed.
Quebec’s model is instructive for several reasons. While its system of subsidized daycare is not perfect, it ensures that all families who wish to send their children to a registered, licensed daycare are not limited by dollars to do so. Introduced in 1997, the subsidy sees parents pay approximately 15% of the cost of service with the provincial government covering the rest. Setting aside the question of whether this split is appropriate, what matters most is research that highlights the significant benefits of early child education, notably on children from lower socio-economic backgrounds. Moreover, a study by University of Montreal economics professor Pierre Fortin found that Quebec’s subsidized daycare system pays for itself thanks to increased tax revenue due, in large part, to an increased rate of female participation in the workforce. Fortin’s study found that for every $1 invested in the system, $1.49 returns to the Federal and Provincial government.
Despite these benefits, Quebec is rather lonely in its approach to early childhood education. Only Prince Edward Island has implemented a similar system of support. In fact, as a whole, Canada spends just 0.2% of GDP on childcare, placing us last amongst comparative OECD economies. We spend 10 times less than the Swedes do on childcare, five times less than the Finns, and half of what the Brits spend.
Increasing our public investment to meet the OECD average would take upwards of $3 billion a year, a figure some will certainly scoff at. Yet given the aforementioned financial returns, and the long-term impacts on inequality and social mobility that a level playing field for children provides, we may want to reconsider our unwillingness to make such investments.
As a small fish in a big pond, Canada’s economic success in a global knowledge economy will be built on our ability to get the most out of every one of our citizens. A significant commitment to childcare and early childhood education is an important step in this direction.
When we ask the women and men of our armed forces to serve abroad, we do so with an understanding that they’ll be taken care when they return home. By eliminating service access points for our veterans and reducing compensation for those disabled as a result of their service, the Conservative government is shirking its contract with our men and women in uniform.
These moves ignore an evolving set of needs. As the increase in cases of post-traumatic stress disorder, and associated suicides, attests to, the needs of former soldiers require attention. A Library of Parliament report released in December noted that upwards of 6,000 new veterans will be released from the Canadian Forces over the coming years who will suffer from mental health issues. At least 2,750 of these veterans will suffer from severe post-traumatic stress disorder.
To close offices and expect those who served abroad to wait in line with me as I renew my health card shows an ignorance of the issues they face, and perhaps more important, shows an absolute failure to think about how to innovate the services we provide to this part of the population. Moreover, we can’t attempt to address the issues veterans are facing if we don’t sit down with them before decisions are made and make them a partner in any reforms.
If Canadians wish to feel proud when we see our troops helping make peace abroad, we need to be willing to uphold our end of the bargain and make sure they are taken care of at home.