- Consulting with Canadians -

Joseph Polito Submission in Response to Finance Canada's Employment Insurance Premium Rate-Setting Mechanism Consultation:

Restructuring Payroll Premiums Creates A Zero Cost Bias For Full Employment

This submission is directed only to the fourth rate setting principle:

The premium rate setting should mitigate the impact on the business cycle.

• The fundamental concept is that the current rate structure actually exacerbate the impact of the a downturn in the business cycle on Canadians, and is at all times an impediment to full employment, work-life balance, and many fundamental goals of the government of Canada and Canadian citizens.
• The proposed change to the rates is based on McMaster Professor William Scarth - that EI premiums must be progressive including a zero rate for a portion of earned income.
• The primary assumption is that not only does existence of premiums (like the existence of taxes) have an impact on the economy, but so does their structure (like market prices).
• It is further assumed that the premiums not only fund EI, but they (like the structure of taxes, their exemptions and incentives) can be a public policy tool.

Part A Recommendations:

To create a bias for full employment, to radically diminish the impact of recessions on government finances, and to facilitate Canada's priorities, restructure payroll taxes:

For Employers

i) Raise the current $3.08 rate back to the 1994 high of $4.30. Apply the revenue to a basic exemption of about $6,149.52.

ii) Dedicate all future cuts to EI to the exemption. Assuming a 14 cent reduction for employers this year, the cumulative revenue saving of $4,433,080,000 would raise the exemption to about $6,872.99.

Result. A bias to full employment would be created, because a major impediment to clearing the labour market would be greatly diminished.

* Rather than through the 'trickle down' path, it directly affects Canadian priorities such as child poverty, high youth and immigrant unemployment (particularly young parents), crime associated with poverty, NAIRU, a family friendly quality of life and widely shared prosperity.

* It is a tax cut for the cash strapped hospitals, universities, municipalities, and school boards

* This proposal would greatly reduce the 30-90 Billion dollars experts say is spent (directly and indirectly) by the three levels of government, to relieve unemployment and its pathology. Hence these governments would now be able to redirect the savings to infrastructure priorities without increasing spending.

iii) Redirect the tax relief scheduled for corporate income taxes to the employer share of EI and CPP. Business would receive the same tax relief with superior results:

*

Unlike corporate income tax cuts, it helps during unprofitable downturns (Nortel)

* Byreducing initial costs & risk, it attracts more investment than corporate tax cuts.

* It unites the employer and the employee, giving each money and an incentive for good family friendly human resources practices.

For Employees

i) Dedicate all future cuts to EI to the exemption. Assuming a 10 cent reduction for the coming year, the exemption would be $1,010.10.

Result: After 3 years the exemption would match the CPP exemption. After 7 years it would approach the personal income tax exemption which protects low-income people.

ii) Raise the current $2.20 rate back to the 1994 high of $3.07. Apply the $3,166,160,000 increase in revenue to a basic exemption of about $6,875.48.

Because this approach would mean that individuals earning more than $34,000 would pay in excess of the current maximum of $858, there would be a cost to $6,875.48 exemption.

The additional $631,628,539.77 to cap payments at $858 would be recovered with the lower employment rate and would:

* remove low income people from the premium schedule consistent with our income tax philosophy

* remove barriers to the labour market, - increased employment would mean less payouts not just from E.I. but from other federal programs.

* most importantly, it would make a significant dent in child poverty!

Note

: Some have made a related proposal to charge payroll premiums on overtime. The theory is of course that it would help to discourage overtime at the expense of new hires who would be contributing to EI and CPP.

Part B Background

1.

The proposal is based on the analysis of William Scarth's C.D. Howe Institute publication- A Job-Creation Strategy for Governments with No Money!

The proposed exemption adapts Professor Scarth's paper to maximize the impact of tax cuts. Management science tripled the output of bricklayers simply by selecting the best known techniques, rather than with any technical breakthroughs. The best tax cut is a reduction of payroll premiums in the form of a large basic exemption.

The proposal is to more than double last year's proposed exemption while reducing the cost to zero!

Last year

the Finance Committee's original recommendation was a $3000 dollar EI exemption at a $2.3 Billion cost.

Finally this proposal would be the carrot side of the reforms to Unemployment Insurance. The previous reforms have been primarily the stick side – to remove inadvertent disincentives to work or retrain or relocate. This proposal creates full employment incentives for employers and employees.

2

. Some of Canada's finest economists have been promoting this market oriented tax strategy to create a powerful bias to full employment in good times and more importantly, in bad.

b) The current structure of our payroll premiums

creates a major impediment to full employment. It is a market incentive for employers to increase unemployment:

* To reduce payroll premium costs, employers rely on overtime and longer workweeks rather than new hires in good times. In slowdowns employers lay off employees rather than reducing everyone's hours a little.

* To reduce premium costs, employers resist family friendly flexible practices, reduced hours, job sharing, education leaves, ... which would reduce stress & unemployment. Addressing employee needs would permit them the time to what David Foot has coined the "sandwich generation" most acutely felt by women with careers, young children and aging parents.

We have created a bias against the best social program – a job. And who are the first to lose their jobs and the last to be hired: our youth, our immigrants and our young parents. The payroll premium structure increases child poverty! Sweden has 4% unemployment and 2.6% child poverty. The Dutch have 2.3% unemployment and 3% poverty.

c)

Constituency offices deal with the devastation and social pathology of unemployment every day. People lose their homes, their cars, and their marriages as a result. Crime is highly correlated to unemployment. Black leaders are blaming high unemployment in their community for the high black on black crime rate.

d) Budgets are also victims

:

In the last recession a half a million jobs were destroyed. The past two recessions left us with $42 billion a year in interest payments - as unemployment welfare and EI skyrocketed.

Part C

The following lists the extraordinary

widespread consensus and support, and the many benefits of this smart tax cut.

1. Consensus and Support -

Others cuts are win-lose which cause divisive debates. This win-win cut would receive unprecedented support from :

* Millions of harried super moms to whom employers won't grant reduced work hours.

* Millions of low-income workers and students who benefit disproportionately.

* Millions of young people and immigrants who have much higher unemployment rates.

* Millions of baby boomers who want more time for family, community and grandchildren.

* All firms, particularly new economy ventures which won't make profits for years but will pay payroll taxes - how will corporate tax cuts help Nortel??

It should be noted that there is much less pressure to cut those taxes than the excess EI premiums. The April 2000 BCNI (Business Council on National Issues) document "Magnetic North" states: "The country has placed in the top five in the World Economic Forum's annual ranking of the most competitive economies for three years in a row."

* All seeking essential needs like housing whose costs would be reduced.

* All taxpayers. We may disagree about flat versus progressive taxes, but we all agree there should be a substantial basic exemption to protect low-income people.

* Millions of Canadians concerned about the environment - reduced unemployment means more investment in labour saving energy efficient technology.

* Millions of students, suffering tuition shock, have no taxable income but pay EI and CPP.

A recent report from University of Western Ontario stated that the average income of families of medical students rose from $80,000 to $140,000 in just three years, after tuition rose from $3000 to $10,000. It is ironic that governments and the Canadian people have made so many fiscal sacrifices to ensure our children 'will not have their futures mortgaged', and that our tuition structure has accomplished the reverse. Meanwhile Europe views post secondary education as the key to the 21^st century, as public education was to the 20^th. There no tuition has become the norm. Europe is following the long successful strategy - subsidize the desirable ( education, retirement savings ...) . and to tax the reverse (cigarette and alcohol consumption ...).

* Countless public sector workers whose employers have become cash strapped.

* Cash strapped, debt burdened provinces who pay EI and CPP.

* Canada's 80,000 registered charities which have found the trend of overemployment has robbed 1,000,000 volunteers (Globe and Mail (André Picard August 18, 2001).

2. Making a Difference

with a Zero Cost Paradigm Shift:

The exemption will provide a financial incentive for employers to create a bias to full employment. Employers will save money by reducing hours, not employees during recessions, and to save money by hiring rather than relying on overtime in good times.

Restructuring payroll premiums can have the same incredible impact as modifying bricklaying; it:

* Reduces Child Poverty – it gives lower income workers more money than an income tax cut and keeps young parents working. The U.S. has the worst poverty rate of the G8 relatively and absolutely. According to UNICEF the U.S. has a 22.4%rate of child poverty. Sweden has 2.6%. The Dutch have 2.0% unemployment and 3% poverty.

* Reduces the negative economic impact of unforeseeable events like 9/11 or the unpredictable results of international agreements like NAFTA & Kyoto.

* Permits employers to focus more on retaining skilled employees in downturns, - saving payroll premium costs, severance cuts, and costly training of new hires.

* Creates a virtuous circle of payroll premium reductions. Several of our Governors of the Bank of Canada have noted that structurally our NAIRU (Non-Accelerating Inflation Rate of Unemployment) is substantially higher than in the U.S. Restructuring our payroll taxes will reduce the gap.

* Reduces the above average unemployment of youth and new Canadians.

* Reduces the income Gap? Business Week magazine discovered the 'trickle down theory' failed in its shocking feature Down and Out in Silicon Valley (March 27/2000). In the most prosperous place in the planet, the lower echelon's wages have been flat for a decade, the need for charity soup kitchens has gone up, and some working poor are homeless.

A recent study by the Congressional Budget Office shows that during the last 20 years, average real after-tax income for the bottom fifth of the population stalled at about $11,000, the top fifth enjoyed a 50% increase, and the top 1% enjoyed a 157% increase. Intriguingly, the U.S. economy had its best growth after George Bush Sr. and Bill Clinton raised taxes modestly in the early 90's.

* Increases R&D – through the reinvestment of payroll tax savings

* Increases global competitiveness - through reduced costs and interest rates

* Maintains low interest rates - reduced payroll costs will reduce cost prices and inflation. High real interest rates led to crushing recessions in the early 80's and 90's – the real cause of our enormous debt burden accordingtoour Nobel economist Robert Mundell. (July,28/98 The Ottawa Citizen): "To get inflation to zero, the Bank of Canada kept raising interest rates until they were five per cent above U.S. rates. ... unemployment increased and real estate prices collapsed." Astonishingly the median family income still has not matched its 1990 pre-recession high says Stats Canada.

* Reduces the brain drain - most people left Canada reluctantly because there was no suitable work

* Reduces the impact of sales taxes - some of the employer payroll tax savings will reduce prices

* Reduces the devastating impact of a recession on Canadians, federal finances, and our health, and education programs.

* Makes tax cuts sustainable in the future

– the U.S. tax cuts have a history of reversals. The cuts of the 80's were partially reversed when unemployment rose.

* Permits employing Ireland's near zero tuition policy.

Conclusion

: The phrase Grant us the knowledge of what is right and just, the courage to choose it and the wisdom to accomplish it, is based on the Arthurian legend. In its quest this committee should look to the economic management Merlins -Professors David Foot, Arthur Donner, William Scarth, and Frank Reid. The Holy Grail is a paradigm shift - restructured payroll premiums. It will provide enormous benefits to our economic, environmental, and social health. It will benefit our children, students, the poor, the private sector, public sector finances, and our health care system.

To create a bias for full employment

with no cost simply by restructuring payroll premiums with a large basic exemption has to be the top recommendation of this committee, especially in light of the fact that health care reform may use up the rest of the budget surplus! Remember the bricklayers. The results can be historic! It will make a lasting difference.

Grant us the knowledge of what is right and just, the courage to choose it and the wisdom to accomplish it.

Appendix: The Economists:

* McMaster University economist William Scarth

has been Fraser Institute and C.D. Howe Institute. He explains that our payroll premium structure is taxing sensible humane resource practices, and subsidizing the reverse in his 1997 publication - A Job-Creation Strategy for Governments with No Money (Appendix A)

http://www.cdhowe.org/pdf/Scarth.pdf

In another paper (Work-Sharing: An Efficiency-Wage Analysis) Scarth cites a government Task Force (1994) - he is referring of course to recommendations of The 1994 Donner Report, and by extension the 1997 Collective Reflection on the Changing Workplace. Restructuring payroll premiums will permit the implementation of these shelved Federal reports.

Scarth refers to the report's suggestions: "that the cap on the country's payroll taxes be eliminated. Since firms make no additional payment to the government for any worker who has already generated the maximum payroll tax burden, the system stimulates the use of overtime hours – not job sharing." (Note: the U.S. has a much higher cap)

"Related suggestions have appeared in the United States; ... (Barrons, 1999, p.6). "Economist Gene Epstein states "Eliminate the payroll tax on the first $10,000 ($15,000 in Canadian dollars) of wages. Since this levy falls especially hard on the working poor, it's the cruelest of all, and cutting it ... would put several hundred extra dollars into paychecks that need it most."

He recently added this perspective "Since the employer pays another 6.2% in "matching funds," I propose we give him the same tax break up $10,000. This would especially aid the self-employed, who have to pay 6.2% twice over. But the way the labor market works, most of the tax benefit to the employer savings would end up in employees' pockets anyway, and create more jobs for low-wage workers.

This tax cut would help motivate poor folks to seek work, and to be more productive, just as supply-side theory predicts. Also, if administering fiscal stimulus is part of the program, then this is one good way to boost consumer spending." Barrons November 18, 2002

Scarth also refers to the eminent free market American economist Edmund Phelps. So concerned is he about the wage gap and unemployment that he advocated the unthinkable - government intervention in his book "Rewarding Work". His proposal subsidized labour markets, and was endorsed by the prestigious free market Economist magazine (Beyond the welfare state 9/20/97) and the business periodical Barrons.

*

The research of Professor Frank Reid Director, Centre for Industrial Relations, University of Toronto indicates that through family friendly measures (leaves and job sharing ...) could reduce unemployment by several hundreds of thousands.

Many people wish to work less for a host of reasons such as education, care of parents or children, and pursuing entrepreneurial dreams.

*

Economist David Foot (author of 'Boom, Bust, & Echo') sees this full employment strategy as essential adaptation to demographic changes.

He suggests that baby boomers will want less work time as their vigor diminishes and as they have grandchildren to enjoy. These baby boomers living a more balanced life will require less health care, and they will apply this pattern of gradually reducing work schedules to their post retirement lives – consequently they will remain productive longer and thus reduce the burden on the next generation and on the pension finances.

Professor Foot states there are additional cost benefits - a baby boomer professor working half time, will save a University enough money to hire a new full time professor.