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.
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.
Last Friday’s Statistics Canada Jobs report sent policy makers across the country scurrying for solutions.
Canadian employment fell by 60,000 full-time jobs in December resulting in a year of nearly zero full-time job growth. What jobs were created in 2013, about 83,000 of them, were all part-time. And if one looks back to the first signs of the recession in 2009, we’ve yet to rebound to an employment rate that accounts for a labour force that keeps growing.
In short, we need jobs. And we need them now.
Looking forward, whether this past years stagnant job performance is indicative of what’s to come for the economy, or whether it’s just a blip in the road, is debatable. A falling loonie promises some breathing space for Canadian manufacturers and exporters, though the benefits of relatively cheaper export prices need to be balanced against the costs of rising import prices. The recently negotiated, though yet to be ratified, Comprehensive Economic and Trade Agreement (CETA) with the European Union is similarly two-faced. While it opens significant opportunities for Canadian firms, we’ll only reap those rewards if public and private actors step up to provide assistance to small and medium sized (SME) businesses unsure of how to access new markets, and how to navigate different regulatory systems. Many will need it in the face of growing competition with European counterparts who on average have far more experienced in dealing with linguistic and regulatory differences (a 27-member economic union has its advantages…)
And so if 2014 is to provide the job creation that Canada needs, far more focus needs to be placed on stimulating demand at home.
Tax credits for job creation are a popular political tool to create that demand but as a small business owner myself, I’ll tell you that a tax credit with no demand won’t add to my workforce. I’ll hire more when the pinging sound on my BlackBerry grows more consistent. Others promise the benefits of cheaper energy, however we should be weary of grandiose promises that avoid the realities of rapidly changing global economy. And finally, dampening consumer demand through an iron-fisted goal of balancing the budget prior to the 2015 Federal Election is certainly of no help either.
So instead why not focus on making our BlackBerry’s ping with a series of pragmatic and feasible solutions that actually make sense:
- Leadership and investment in infrastructure. According to the Federation of Canadian Municipalities, gridlock costs the Canadian economy $10 billion year. If you’ve had the misfortune of traveling the 401 between KW and Toronto you know why. We desperately need to fund rapid transit between these core nodes of the economy to get people more effectively to and from, and to free up our highways for the movement of people and goods.
- Understand and act on the fact that social services are good long-term investments. Whether it’s childcare, crime prevention programs, refugee healthcare or a form of basic income, investments in helping people help themselves are amongst the soundest we can make. In contrast, cuts to such services will end up costing up far more in the medium and long-term. And while this might mean finding new dollars to fund necessary programs, we need all those who want to do better to have the tools to do. For when they benefit, every business owner, tax payer and community member wins too.
- Open up new pathways for financing for SMEs and startups. Across the globe, jurisdictions are thinking creatively about how to ensure good ideas and potentially significant job creators don’t lie idle due to a lack of capital. Tech-enabled crowdsourcing platforms need regulatory approval at the provincial level to get off the ground. Doing so will open up new avenues for small businesses needing capital to get off the ground or to expand, and could mean significant additions to payrolls. There are certainly risks with these models, however there’s no reason we should shy away from a few bold pilot projects and experiments to make sure we’re doing everything we can to catalyze the economy.
- Expand programs like the Canadian Digital Media Network’s Soft Landing program, which helps SMEs set-up in emerging markets for short periods to learn about potential export opportunities, and leverage the concept of IT accelerators and incubators across other sectors of the economy, notably the service sector and additive manufacturing. The University of Waterloo’s Velocity Program is well on its way regarding 3D print related incubation, but we need to see these models replicated across the country.
(Published in the Waterloo Record on November 2, 2013: http://www.therecord.com/opinion-story/4187196-on-balance-canada-eu-trade-deal-a-move-in-the-right-direction/ )
At first glance, pulling off what Stephen Harper’s government has called the Wayne Gretzky of international trade deals is certainly to be applauded.
Based on the limited documents so far released by the government of Canada on the “agreement-in-principle” reached with the European Union on a comprehensive economic and trade agreement, the agreement offers significant improvements for Canadian exporters, and the promise of decreased costs for a variety of imports.
Whether they’re of the Gretzky variety is debatable given that prior to this agreement, three-quarters of tariff lines for trade between the two parties was already duty-free, and the average tariff on Canadian exports was a paltry two per cent. However, what’s clear is that the trade agreement helps solidify the diversification of the Canadian economy away from its gravity-induced dependence on the United States.
In so doing, Harper completes a process of economic diplomacy that began in the early 1970s when then-prime minister Pierre Trudeau proposed Europe as a “third option” and the key to lessening Canada’s economic dependence on the U.S.
The agreement will certainly have its critics. Some sectors of the economy, notably those previously protected by closed government procurement processes, will now face increased competition and potentially pressure on margins.
However, complaints about increased imports, for example from the Canadian dairy industry, are likely unfounded given the still-tiny share of European cheese in our consumer baskets and the unlikely event that French blue cheese will replace cheddar in many of our grilled cheeses.
Important questions remain, however, regarding the effects of increased patent protection on medicines and the subsequent impact on provincial health care budgets, as well as the impact of changes on labour mobility for contract workers.
Moreover, the gains from the trade agreement are likely to be nowhere near those advertised by the Canadian government. The government’s oft-quoted $12 billion and 80,000 jobs increase is based on a series of assumptions related to market share and productivity increases that most serious commentators have noted are unrealistic.
Perhaps most disappointing about the comprehensive economic and trade agreement process has been the lack of public engagement.
In the 1980s, a joint Senate-Commons committee held thousands of public hearings on the topic of U.S.-Canadian trade, and on the then-proposed U.S.-Canada free trade agreement.
On the comprehensive economic and trade agreement, however, there has been no such public participation.
The government has done little to engage Canadians on the topic, with only leaked versions of negotiating texts available via European sources prior to the announcement of an “agreement-in-principle” in October. Our understanding of whether this is truly a Gretzky-type deal is thus limited by a lack of detail and fine print.
This, however, should not obscure from the trade deal’s importance. Not so much for its immediate economic impact but rather that as a small, trading nation we need to keep a step ahead of our competitors.
The launch of U.S.-EU talks on a transatlantic trade agreement between the world’s two largest economic blocs placed significant pressure on Canadian negotiators. Had Canada failed in its talks with the EU, the Europeans could have turned to the U.S. and offered privileged access to U.S., rather than Canadian exporters.
Given the similar basket of non-resource goods and services originating in both Canada and the U.S., allowing four years of negotiation to lead to failure would have meant significant disadvantages for Canadian producers and consumers.
Let’s just hope that the final negotiating text, if we ever get to see it, doesn’t include any unforeseen surprises.