Finances of the Nation Research Roundup – July 30

By Nick Mahoney.

This instalment of the Finances of the Nation Research Roundup Series – which aims to aggregate selected current research from think tanks, journals and other relevant sources relating to the Finances of the Nation project – covers the Bank of Canada Monetary Policy Report, profit shifting by multinational enterprises, a number of Canadian think tank articles relevant during the pandemic, Newfoundland and Labrador’s fiscal update and much more.

On July 15th, the Bank of Canada released a Monetary Policy Report, detailing what Canada’s economic recovery might look like under two differing scenarios, as well as some forward guidance regarding quantitative easing. The Bank also put forth a statement on its policy interest rate, which explicitly confirms that the rate will remain at its effective lower bound until “the 2 percent inflation target is sustainably achieved.” The implications of a monetary commitment like this for fiscal policy is discussed in a new NBER working paper, “Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight” by Michael Woodford and Yinxi Xie. The paper argues that countercyclical fiscal transfers can be a powerful stabilization tool, especially when central banks commit to “keeping interest rates ‘lower for longer’ following a crisis that causes the ZLB to become a binding constraint continues to be desirable in the framework for policy analysis proposed here.”

Other recent papers also offer insights which are relevant in light of the presence of the novel coronavirus pandemic. An analysis of permanent layoffs in Canada by the Institute for Research on Public Policy is of obvious relevance at this time. The study contends that assistance policies should avoid focusing on mass layoffs, and that by targeting individuals likely to face greater difficulties following layoffs, such as long-tenured workers, policies can be less expensive and more effective.

A study from the University of Calgary’s School of Public Policy, “Less Income for More Hours of Work: Barriers to Work for Income Assistance Recipients in B.C.” analyzes the structure and incentive effects of Income Assistance in British Columbia, concluding that the program creates barriers to work, particularly because of the current phase-out structure of the program. The authors note that “While there is no single solution to encouraging employment and thus enhanced social inclusion, steps need to be taken to ensure a more socially integrated, inclusive and cohesive society.”

A study by the Fraser Institute, “Distribution of CERB: Estimating the Number of Eligible Young People Living with Parents”, examines some characteristics of the take-up of the Canada Emergency Response Benefit. The report estimates that a number of young Canadians – aged 15-24 – have returned to living with their parents, many of which are households with total income above $100 000. Among these returnees, 855,500 made less than $24 000 – the amount equivalent to a hypothetical 12 months of CERB payments – last year and thus have experienced no monthly income decline.

On July 17th the federal government announced changes to the Canada Emergency Wage Subsidy, and on July 28th, royal assent was given to Bill C20, extending the subsidy through the end of the calendar year. While there is little analysis available on the Canadian program, a recent paper from a group of American researchers estimates that the Payroll Protection Program – the American wage subsidy program – “increased the level of employment at eligible firms by between 2 percent and 4.5 percent.” This estimate implies that the program boosted employment in the United States by between 1.4 and 3.2 million jobs.

The Government of Newfoundland and Labrador released its fiscal update on July 24th. Having faced a collapse in crude prices in tandem with the pandemic, the province will see significant decreases in revenue. However, as noted in Scotiabank’s analysis of the update, the effects are not as harsh as many expected as the economy has been shored up partially by increases in oil production.

An enduring issue which has perhaps taken a back seat during the pandemic is profit shifting by multinational enterprises. OECD analysis of data on corporate tax rates affirms the notion that cutting corporate tax rates may lead to increased reporting of profits in a region without actually spurring economic activity in the region. This is particularly relevant in light of the recent significant corporate tax cut implemented in Alberta.

An article from policynote presents data driven insights on how the pandemic has had an unequal effect on BC Workers. Author Iglika Ivanova finds that low-wage, non-unionized, young, female and indigenous workers were among the demographics to have been disproportionately harmed during this time.  

As municipal governments call on both the provinces and federal governments for support, municipal finances have taken a more prominent role in the headlines. Two recent studies call for greater authority to be given to municipal governments in awarding contracts. NBER working paper “Evaluating State and Local Business Tax Incentives” by Cailin Slattery and Owen Zidar gives a case study and examines the tradeoffs between discretionary firm-specific subsidies and corporate tax cuts. While focussing on the U.S., this study has implications for Canada. Similarly, “Buying with Intent: Public Procurement for Innovation by Provincial and Municipal Governments” from the School of Public Policy’s Daria Crisan notes that Canadian “provincial and municipal governments are responsible for the bulk of the country’s public procurement, more than in any other OECD country” and calls public procurement  “potentially the most powerful, yet currently underutilized, tool for stimulating innovation from the demand side”.  

The Canadian Centre for Policy Alternatives (CCPA) released an “Alternative Federal Budget” detailing its proposed economic recovery plan, including a section on tax fairness for the short-, medium- and long-term recovery phases. Of note are proposals for digital services taxes on multinational e-commerce firms, an annual wealth tax, eliminating tax loopholes and tax-havens, restoring corporate tax rates and introducing a financial activities tax, among others.

The Office of the Parliamentary Budget Officer (PBO) released a report costing a proposed wealth tax. The report estimates that taxing Canadian resident economic families on 1 percent of net wealth – including all assets and liabilities except for lottery winnings – above $20 million would generate net revenue of $5.6 billion in 2020-21.

media release by Canadians for Tax Fairness, examines the extent of corporate tax avoidance in Canada. It is estimated that the amount of Canadian corporate assets in tax havens has surpassed previous highs and reached upwards of $380 Billion. As the tax bases of governments shrink during the pandemic, it is plausible that tax compliance becomes a focal point for governments, the media and citizens alike. An NBER working paper by Natasha Sarin and Lawrence H. Summers addresses this issue in a U.S. context, estimating that additional investment in the Internal Revenue Service could bring about returns on a scale of 10:1.

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