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April 7 & 8, 2022

2022

Public Finance

in the Real World

Taxation and Redistribution

Presenter

Kevin Milligan

Vancouver School of Economics

Vancouver, Canada

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Discussant:

Gillian Petit

University of Calgary

Calgary, Canada

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All in the Family: Assessing Need in the Fiscal Unit

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Kevin Milligan

Vancouver School of Economics

University of British Columbia

kevin.milligan@ubc.ca

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Feedback welcome!

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Inspiration: Bird (1980, AEA P&P)

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“Here as elsewhere it is very difficult to disentangle the positive and normative components of fiscal incidence studies.” (p. 78)

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Inspiration: Bird (1980, AEA P&P)

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“Here as elsewhere it is very difficult to disentangle the positive and normative components of fiscal incidence studies.” (p. 78)

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“What is needed to improve both the policy relevance…is not continued manipulation of masses of numbers in a search for an unknowable truth about fiscal incidence in the large, but rather more detailed study of the distributional impact of specific small budgetary changes in particular circumstances.” (p. 80)

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Question: Impact of Fiscal Unit

Economic unit: how people are aggregated in statistical analysis of wellbeing.

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Fiscal unit: how people are aggregated in the tax and transfer system.

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Question: Impact of Fiscal Unit

Economic unit: how people are aggregated in statistical analysis of wellbeing.

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Fiscal unit: how people are aggregated in the tax and transfer system.

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Question: Does discord between economic and fiscal unit matter for assessment of need?

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Contributions (and plan of talk)

For economic vs. fiscal units, explore and characterize:

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  1. Definitional differences.

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  • Empirical prevalence of discord.

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  • Empirical importance of discord.

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Contributions (and plan of talk)

For economic vs. fiscal units, explore and characterize:

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  1. Definitional differences.

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  • Empirical prevalence of discord.

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  • Empirical importance of discord.

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Economic Unit: Definition

Why define an economic unit?

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Economic Unit: Definition

Why define an economic unit?

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  1. We want to understand wellbeing (consumption, income, health, time).
  2. People pool resources or are affected by externalities of others.

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Economic Unit: Definition

How to define an economic unit?

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Benchmark for the economic unit is provided by statistical agencies.

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Economic Unit: Definition

How to define an economic unit?

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Benchmark for the economic unit is provided by statistical agencies.

For Canada, Statistics Canada defines the economic family as:

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“a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law union, adoption or a foster relationship.”

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Economic Unit: Definition

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“a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law union, adoption or a foster relationship.”

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Key elements:

  • Cohabitation.
  • “Family” relationship.

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Relevance:

  • Used for the Official Poverty Line in Poverty Reduction Act.

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Fiscal Unit: Definition

Why define a fiscal unit?

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Fiscal Unit: Definition

Why define a fiscal unit?

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  1. Needed to treat ‘like as like’ for horizontal and vertical equity; redistribution.
  2. Used for defining taxable income for rates-and-brackets redistribution.
  3. Used for defining entitlements for benefits.

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Fiscal Unit: Definition

Why define a fiscal unit?

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  1. Needed to treat ‘like as like’ for horizontal and vertical equity; redistribution.
  2. Used for defining taxable income for rates-and-brackets redistribution.
  3. Used for defining entitlements for benefits.

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Paper’s focus: assessing need.

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Fiscal Unit: Definition

How to define a fiscal unit?

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Fiscal Unit: Definition

How to define a fiscal unit?

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Four considerations:

  1. Equity.
  2. Efficiency.
  3. Administration.
  4. Autonomy.

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Fiscal Unit: Definition

How did Carter Commission trade off considerations? (Vol. 3, Ch. 10.)

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  1. Equity: Much effort to fine-tune tax base to compare ‘likes’.
  2. Efficiency:
  3. Administration:
  4. Autonomy:

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Fiscal Unit: Definition

How did Carter Commission trade off considerations? (Vol. 3, Ch. 10.)

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  1. Equity: Much effort to fine-tune tax base to compare ‘likes’.
  2. Efficiency: Recognition of impact of high taxes on low earners. (“schoolboy” example)
  3. Administration:
  4. Autonomy:

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Fiscal Unit: Definition

How did Carter Commission trade off considerations? (Vol. 3, Ch. 10.)

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  1. Equity: Much effort to fine-tune tax base to compare ‘likes’.
  2. Efficiency: Recognition of impact of high taxes on low earners. (“schoolboy” example)
  3. Administration: Sequestered older relatives from family pooling because of difficulty of anti-avoidance rules for intra-family gifts.
  4. Autonomy:

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Fiscal Unit: Definition

How did Carter Commission trade off considerations? (Vol. 3, Ch. 10.)

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  1. Equity: Much effort to fine-tune tax base to compare ‘likes’.
  2. Efficiency: Recognition of impact of high taxes on low earners. (“schoolboy” example)
  3. Administration: Sequestered older relatives from family pooling because of difficulty of anti-avoidance rules for intra-family gifts.
  4. Autonomy: Nope nope nope.

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Fiscal Unit: Definition

Carter on “the family”:

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(p. 124)

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“not concerned…with sociological issues, but with taxation…”

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Fiscal Unit: Definition

Carter on “the family”:

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(p. 124)

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“not concerned…with sociological issues, but with taxation…”

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Next clause:

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“firm conclusion” that “the family, as we find it in our modern society, continues to be the basic economic and financial entity”

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Fiscal Unit: Definition

Carter on “the family”:

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(p. 124)

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“not concerned…with sociological issues, but with taxation…”

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Next clause:

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“firm conclusion” that “the family, as we find it in our modern society, continues to be the basic economic and financial entity”

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Not wrong, but you really can’t avoid doing some sociology….

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Fiscal Unit: Definition

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“firm conclusion” that “the family, as we find it in our modern society, continues to be the basic economic and financial entity”

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(Carter op. cit., p. 124)

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…which returns to Richard Bird’s point.

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What is sometimes cast as ‘purely positive’ analysis has at its root some really normative judgments about measurement.

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Fiscal Unit: Definition

I will stick to a purely positive question:

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How does the Income Tax Act define the fiscal unit?

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Fiscal Unit: Definition

How does Income Tax Act define fiscal unit?

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  1. For rates-and-brackets redistribution: Mostly the individual.

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(exceptions: some credit sharing; income attribution; income splitting)

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Fiscal Unit: Definition

How does Income Tax Act define fiscal unit?

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  1. For rates-and-brackets redistribution: Mostly the individual.

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  • For income-tax-based benefits: Couple income; age 0-17 kids.

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Fiscal Unit: Definition

How does Income Tax Act define fiscal unit?

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  1. For rates-and-brackets redistribution: Mostly the individual.

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  • For income-tax-based benefits: Couple income; age 0-17 kids.
    • Line 23600 joint net income.
    • Kids age 0-17 count for benefits; not income.
    • Benefit year: 2021 income counts for July 2022-June 2023.
    • Exceptions: disabilities; caregivers.

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Contrasting economic and fiscal unit

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Start with core fiscal unit. (Person, partner, kids age 0-17)

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Core fiscal unit

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Contrasting economic and fiscal unit

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Start with core fiscal unit. (Person, partner, kids age 0-17)

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  • Add cohabitating unmarried children 18+

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Children 18+

Core fiscal unit

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Contrasting economic and fiscal unit

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Start with core fiscal unit. (Person, partner, kids age 0-17)

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  • Add cohabitating unmarried children 18+
  • Add Other family members

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= Economic Family.

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Other family

Children 18+

Core fiscal unit

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Summary: Definitional Differences

Economic unit:

  • Used for measurement of wellbeing
  • Broad definition of family.

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Fiscal unit:

  • Used for assessing need for income-tax-based transfers (GST; CCB; etc.)
  • Narrow definition of family.

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Contributions (and plan of talk)

For economic vs. fiscal units, explore and characterize:

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  1. Definitional differences.

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  • Empirical prevalence of discord.

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  • Empirical importance of discord.

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Empirical prevalence

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The points of this section:

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  • How big are the different chunks.
  • How have they changed over time.
  • Who are they.

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Other family

Children 18+

Core fiscal unit

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Data

Canadian Census:

  • I use the public-use microdata files, 1971-2016.
  • Sample is 1% of population (1971) to 2.7% in 2016.
  • Tag the living arrangements of each individual in the data.

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Data

Canadian Census:

  • I use the public-use microdata files, 1971-2016.
  • Sample is 1% of population (1971) to 2.7% in 2016.
  • Tag the living arrangements of each individual in the data.

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Two focuses:

  1. Unmarried age 18+ living with parents.
  2. Other family members cohabitating.

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Unmarried age 18+ living with parents

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  • Graphed by age.
  • Each line is a different census.
  • Indicated year is highlighted in purple.

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  • In 1971, 13.4% of 25 year olds lived with parents.

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  • In 2016, it took until age 31 to reach 13.4%.

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  • Driven not just by more PSE attendance; also more home-living by non-PSE.

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Unmarried age 18+ living with parents

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  • Bar shows proportion of 18+ kids with indicated characteristic in 2016.

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  • ⊗ shows age 18-39 population average.

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Kids 18+ living with parents: Who are they?

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  • Bar shows proportion of 18+ kids with indicated characteristic in 2016.
  • ⊗ shows age 18-39 population average.

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  • Most are employed, in school, have family income of 100k+ and live in 4+ bedroom SFH.
  • Very few in poverty or NEET.

Kids 18+ living with parents: Who are they?

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Reminder

Start with core fiscal unit. (Person, partner, kids age 0-17)

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  • Add cohabitating unmarried children 18+
  • Add Other family members

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= Economic Family.

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Other family

Children 18+

Core fiscal unit

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Other family members

  • Graphed by age.
  • Each line is a different census.
  • Could be aunt, grandmother, married grandparents, cousin, married children,+.
  • Indicated year is highlighted in orange.

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Other family members

  • 1971: 15%+ of those age 80+.
    • Dropped to 6% in 2011.

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Other family members

  • 1971: 15%+ of those age 80+.
    • Dropped to 6% in 2011.

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  • Bump in mid-20s to 30s driven by married kids living with parents.

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Other family members: Who are they?

  • Bar shows proportion of other family members with indicated characteristic in 2011.
  • ⊗ shows full population average.

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Other family members: Who are they?

  • Bar shows proportion of other family members with indicated characteristic in 2011.
  • ⊗ shows full population average.

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  • More likely: immigrant; age 65+, female; single; own income low.
  • Half are in $100K+ families, 4BR house in big metro.

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Prevalence: Discord fiscal vs. economic unit

  • Start with unmarried children 18+ living with parents. (9.3%)

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Prevalence: Discord fiscal vs. economic unit

  • Start with unmarried children 18+ living with parents. (9.3%)

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  • Add on other family members. (3.4%)

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Prevalence: Discord fiscal vs. economic unit

  • Start with unmarried children 18+ living with parents. (9.3%)

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  • Add on other family members. (3.4%)

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  • Incidental: people in a core fiscal unit alongside kids 18+ or other family members. (15.7%)

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Prevalence: Discord fiscal vs. economic unit

  • Start with unmarried children 18+ living with parents. (9.3%)
  • Add on other family members. (3.4%)
  • Incidental: people in a core fiscal unit alongside kids 18+ or other family members. (15.7%)

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  • Total is 28.4%. (Percent of people living in a ‘discord’ family.)

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Contributions (and plan of talk)

For economic vs. fiscal units, explore and characterize:

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  1. Definitional differences.

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  • Empirical prevalence of discord.

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  • Empirical importance of discord.

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Does any of this matter?

To gauge importance, let’s take a look at two case studies.

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  1. Poverty measurement.

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  • Basic income.

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Poverty Measurement

2019 Poverty Reduction Act legislated an official poverty measure.

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  • Market Basket Measure.
  • How much income is needed to afford a specified basket of goods+services?
  • Adjusted for family size, province, city size.
  • Uses economic family concept.

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Poverty Measurement

The counterfactual experiment:

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  • Takes the joint couple income and the family structure of the fiscal unit and assess that income against the MBM poverty line.

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“Would this family be tagged as under the MBM poverty line if we only looked at the income and the family members considered by the fiscal unit.”

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Poverty Measurement

How I do it:

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  • Use the 2018 Canadian Income Survey.
  • Break observed Economic Families into fiscal units.
    • Age 18+ living with parents are now their own fiscal unit.
    • Other family members are now their own fiscal units.

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Poverty Measurement

How I do it:

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  • Use the 2018 Canadian Income Survey.
  • Break observed Economic Families into fiscal units.
    • Age 18+ living with parents are now their own fiscal unit.
    • Other family members are now their own fiscal units.

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  • Aggregate incomes of the single or couple in the fiscal unit and compare to the MBM line for the appropriate fiscal unit size.

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Poverty Measurement

  • 21.8% appear to be in poverty if you look just at their fiscal unit.

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Poverty Measurement

  • 21.8% appear to be in poverty if you look just at their fiscal unit.

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  • Half of those (50.7%) are actually in ‘true’ MBM poverty.

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Poverty Measurement

  • 21.8% appear to be in poverty if you look just at their fiscal unit.

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  • Half of those (50.7%) are actually in ‘true’ MBM poverty.

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  • Most of the rest (34%) are unmarried children 18+ living with parents.

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Basic Income

Many income transfers are discussed under the label ‘basic income’:

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  • Some proposals are universal and unconditional.

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Basic Income

Many income transfers are discussed under the label ‘basic income’:

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  • Some proposals are universal and unconditional.

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  • Other proposals use existing tax system to deliver income-tested benefit based on the fiscal unit (line 23600 couple income).

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Basic Income

The Ontario Pilot, 2017-2019:

  • $16,989 per single.
  • $24,027 per couple.
  • Phase out rate is 50% on earned income.

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Basic Income

The Ontario Pilot, 2017-2019:

  • $16,989 per single.
  • $24,027 per couple.
  • Phase out rate is 50% on earned income.

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Family Unit: Age 18+; single or couple.

  • Implication: Children 18+ at home get their own benefit. Other family members get their own benefit.
  • Feature or bug? Autonomy vs. poverty reduction.

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Basic Income

What I do:

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  • Take the 2018 Canadian Income Survey.
  • Assign the Ontario basic income according to observed income and fiscal unit.

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Basic Income

What I do:

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  • Take the 2018 Canadian Income Survey.
  • Assign the Ontario basic income according to observed income and fiscal unit.
  • Aggregate total cost of the basic income.
  • Observe what percent of the total spend goes to different types of people.

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Basic Income

What percent of total spend goes to:

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  • People not in MBM poverty: 63%.

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  • Child 18+ living with parents: 40%.

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  • People in economic family with $100K+ income: 28%.

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Conclusions

Differences: Fiscal unit used to target fiscal measures is different than

economic unit used to measure wellbeing and target poverty.

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Magnitudes: 28% of Canadians live in a fiscal unit distinct from economic

unit. Biggest driver: kids 18+ living with parents.

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Importance: Large mismeasurement of economic need if we use fiscal unit

to redistribute.

Public Finance in the Real World: A Symposium in Honour of Richard Bird

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All in the Family: Assessing Need in the Fiscal Unit

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Kevin Milligan

Vancouver School of Economics

University of British Columbia

kevin.milligan@ubc.ca

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Feedback welcome!

Public Finance in the Real World: A Symposium in Honour of Richard Bird

Kevin Milligan

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Taxation and Redistribution