Kevin Milligan

I’m presenting on Wednesday morning at the University of Toronto. The conference is organized by the School of Public Policy and Governance, under the theme “Social Policy for the Next Generations: Designing Resilient Pension Policy for a Changing Social and Economic Landscape.”

I’m presenting at 9:15am. The title of my presentation is “Employment and Mortality of Older Canadians: Implications for Pensions” Here are my slides.

The group UBCC350 has initiated a ‘Divest UBC’ campaign to promote the idea that the UBC endowment should divest from investments in fossil fuels. UBC Professors will be voting on this matter between January 26th and February 6th.

I have read their proposal. I don’t find it convincing.

I will vote ‘no’ in the referendum. Here are my reasons.

1. Divestment is ineffective. 

Assets are priced, more or less, on the value of their future income stream. If a large number of investors sells some asset for reasons unrelated to the value of the asset’s future income stream, the sellers may push the asset price down temporarily. But so long as there is one well-financed investor who wishes to take advantage of this mis-pricing, the asset price will soon be restored to its original level. This leaves no change in the financial position of the company, but leaves the original investors who have now divested in a worse position because of lost portfolio diversification possibilities. What’s more, this action has also provided a deep-pocketed financier (who by construction does not share the moral stance of the divestors) a profitable arbitrage opportunity.

Sometimes I take moral or political stances on things. I prefer to spend my time on moral or political measures that are effective to those that are not. Divestment is not effective.

2. Morality is diverse and reconciling that diversity views brings costs without benefits.

The UBCC350 proposal repeatedly stresses the opinion that burning fossil fuels is not moral. I don’t wish to change their mind. But I do hope they will acknowledge that other people have different moral positions which are in their minds equally logical, heart-felt, and honest as the moral position advanced by UBCC350. For example, someone deeply concerned about global warming may sincerely believe that running cars that burn fossil fuel is less moral than providing the fossil fuel that runs those cars. Another similarly-concerned person may believe that building and buying houses in lightly-densified suburbs is immoral. How sure is UBCC350 that fossil fuel companies alone are worthy of moral censure?

Because of differing moral sentiments, collective decisions about the management of portfolios become difficult. Why just oil or cars, some may ask, what about cigarettes? What about garage door companies that provide services to cigarette factories? I don’t mean to make light of the serious moral views that some may hold–only to emphasize that reconciling differing views is a non-trivial task.

Trying to reconcile differing moral views brings two consequences. First, faculty time and energy will be spent in never-ending debates about which set of moral values should prevail. Second, portfolio managers will have their time diverted from optimizing the risk-return balance of the portfolio to satisfying the moral constraints imposed on their investment choices. Neither of these consequences will lead to higher returns or lower portfolio risk, but both are costly in effort and time. Therefore, we lose by trying.

In my view, we can avoid the argument by setting aside moral concerns for the selection of assets in the endowment portfolio. So long as a company is obeying the law of the land, I believe it should be considered for investment.

If one wishes to exercise a moral view on one’s own investment account, that is one’s prerogative. In fact, a savvy investor could hold a short position in oil companies on his or her own account to perfectly offset the positions held in the collectively-managed account.

In light of these arguments, I believe portfolio managers for the UBC endowment should be tasked with the proper balance of risk and return, and nothing more.

Kevin Milligan, Associate Professor

In 2013, I wrote some personal ‘rules for Twitter’ and posted them on an obscure part of my website. I’ve had a few requests for that hard-to-find link, so I thought I would re-publish them here.

At the time I wrote these rules, I received some push-back from other academics particularly on the parts about junior faculty and tweeting. Upon further thought, I stand with what I wrote in 2013.

You can find me on twitter @kevinmilligan.

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My Rules for Twitter

June 26, 2013

Below are my personal rules for twitter. I was motivated to write this after reading the rules for journalists suggested by Globe and Mail writer Steve Ladurantaye. As an academic rather than a journalist, my rules have some different flavours.

My rules also reflect my own personal experience, views, and goals. I started tweeting during the ‘Census crisis’ of 2010, and have continued in the three years since. I haven’t always lived up to these standards, but I do aspire to. Other academics may have different experiences, views, and goals. I offer my ‘rules’ to promote some discussion and thought, not as commandments that must be observed.

1. Develop clear goals and firm limits about what you are trying to accomplish with Twitter. Measure each tweet against these goals and limits.
2. Prime goal: be an authoritative, fair-minded source on your areas of specialty. Be a scholar. That’s why universities pay us; that’s what we have to offer society.
3. Personal / off topic tweets in moderation. I think people follow me to learn about economics, not to learn about my views on Mad Men, civil rights, my lunch, or my garden. A few personal / offtopic tweets in the mix now and then make your feed more human. But oversharing detracts from professionalism.
4. Stay positive. Be polite. Address people as you would in person. Excessive snark is tiresome, and also corrosive to your professional reputation. If you have to preface a serious tweet with “Serious question:…” then you have a problem.
5. Always remember that coauthors, colleagues, and administrators, are watching. Tenure committees are watching, too. They are thinking: “you could be doing something else right now.”
6. Don’t start fights; don’t engage those wanting to fight. There is no gain from winning the internet.
7. Engage others–ask questions to enhance your knowledge or your research. Twitter has helped me improve my own work, as well as find many useful new resources.
8. Block liberally. Life is too short to deal with trolls, baiting, and assorted negativity. Speech is free. Yelling in my ear is not.
9. Take great care to respect the privacy of meetings. Know what is and should be in the public domain and what is not.
10. Tweet links to source documents to help non-specialists find them. This is a great service.
11. Academic freedom is wonderful. Unlike journalists (or pretty much anyone else), I am very unlikely to ever be fired because of an errant tweet. UBC has astrong policy backing speech that is “unpopular” or even “abhorrent”. But UBC also wants me to ensure an “environment of tolerance and mutual respect that is free from harassment and discrimination”. To me, this responsibility is a fair price for the wonderful freedom.
12. Tweeting is, at best, unhelpful for your research reputation. Junior scholars should tweet sparingly. (See 5 above.) Tenure and promotion committees evaluate evidence on whether you will be a productive scholar for the rest of your tenured life. Too much Twitter is going to be interpreted as a bad signal of future productivity.
13. Be sure of your facts. An incorrect fact can spread very quickly. Be authoritative. Don’t guess. Look it up; tweet the source.
14. You are always one tweet away from hurting not only your own reputation, but the reputation of your department and your university. Be careful.
15. When (not if) you make a mistake, retract. Be humble, apologetic, and correct it as quickly and completely as you can.

Speaking notes

Kevin Milligan

Talk with data librarians: ACCOLEDS

Vancouver BC

November 27, 2014

“The future of data in the social sciences”

Slides here

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Introduction

Two news stories this week perfectly capture the tension I want to emphasize in my time with you here this morning.

• Economist Ross Finnie and his team at University of Ottawa released an amazing new study on the earnings paths of UofO graduates; tracked for multiple cohorts for over a decade after graduation. “Ross Finnie has put together the best new data source in Canadian PSE in a decade.” Said Alex Usher, education analyst.
• Data breach from CRA. The personal tax information of thousands of Canadians—including some very famous ones—was emailed to CBC in violation of these taxpayers’ privacy.

We are now in an era in which large administrative datasets allow us unimaginable insights into some of the most important questions that social scientists want to know about our society. In turn, these insights are vitally important for the design of public policy; to effectively spend our tax dollars where they are most needed.

But, these datasets can be dangerous. Citizens fear that the private information they trusted will not be handled carefully or will be misused by government officials or researchers. They fear the ‘big brother database.’

Fears of data breaches like this one put all of our research with administrative data at risk.  The media—and the public—does a very poor job of discriminating between cases where big administrative data are being used with appropriate care and cases where they are not. With every case like the CRA leak, it gets harder to maintain public support for the research use of administrative data.

I’m here today to argue that you, as data librarians, and we as social scientist data users, must stake out leadership roles in this debate.  There are lots of people willing to stoke the fire of fear about data use. But we, as people who work with data every working day, we know better than anyone the great value to society that can be unlocked through data analysis. There is no one better placed to make this case to the public than us. We should; and we must.

Here’s the plan for my talk with you today. Three items on the agenda:

• First, I’ll let you know a bit more about me, so that you can understand my approach to the questions of data.
• Second, I’ll identify four big trends in the data world that I think are driving the transformation we’re seeing in the data world away from surveys and toward admin datasets.
• Finally, I want to lay out a plan of action.

I’m aiming to get through all this smartly, so that we will have some time for discussion as well.

 Where am I coming from?

I’m a data user. I did my graduate work in Toronto in economics, focusing on empirical questions of taxation and labour economics. I interacted a lot with UofT data librarian Laine Ruus, who I know was a strong and cherished leader in your community of data librarians. I worked with lots of PUMFs as I got going with my thesis, from the FAMEX to the SHS to the SCF to the Census.

But, my formative time at “Toronto” was actually spent in Ottawa.  I spent two entire summers (and a great deal of time over the winters) working on big administrative datasets in Ottawa. One was housed at the Department of Finance; an internal version of the LAD based on personal T1 taxfiler data. The other project was at Statistics Canada working on something called the Longitudinal Worker File, as well as really raw T4-based earnings records going back to 1971.

From these projects, I got a fantastic education about the features of administrative data.

• The great value of what can be learned. We had huge sample sizes, with the actual relevant data for the questions we were asking. No guessing, no imputation. We could answer questions decisively.

• The great challenges of working with such large datasets. Waiting two days for a big SAS merge to run only to find I mis-specified something in my program or forgot to end a command line with the necessary semi-colon. Figuring out why there was missing data for one person in one year, but three observations for that person in another.

I also learned a lot about the work culture of the people who work at Statistics Canada, and how deeply they value the trust that Canadians place in them when they respond to surveys or give permission to merge admin files.

After my graduate work, I moved on to a job in what’s now the Vancouver School of Economics at UBC, working with a tremendous set of colleagues and graduate students who use data every day.  It was my pleasure to work with UBC’s data librarian Mary Luebbe for a decade, and I’m enjoying now working with Darrel Bailie.

I was one of the first users at the RDC at UBC, and for 7 years, I have served as the director of the BCIRDC.

Ok….Let’s talk about the data.

Surveys are dying; admin datasets are rising

I’m going to identify four big trends that I think are shaping the changes underway in the data world.  Then talk about the implications.

1. Response rates are sinking.

The trend in response rates for surveys since the 1990s is sharply down. In the chart, you can see the response rates from the main household expenditure surveys in Canada, the US, the UK, and Australia.

Social scientists who’ve looked at these trends have suggested different answers.

• Some cite the ‘Bowling Alone’ phenomenon that arose in our awareness in the 1990s. Data suggest that people seem much less socially engaged then they were in previous generations.
• Of late, people don’t answer their phones and the kids these days don’t even have landlines. 90% of the calls I get at home are spam—the WestJet call or the ‘cruise ship horn’ call.
• Trust in government and big institutions have plummeted. People are very wary of what government might do with their data. This was inflamed by the federal government’s execrable decision in the Census debate to fan the flames of fear about how researchers and public servants use data collected from citizens. To my mind, this is the greatest sadness from the loss of the census. The survey itself can be restored by passing a law. But restoring public trust that is now influenced by some partisan flavours will be harder.

Whatever the cause, it is happening.

Of course, we can somewhat correct for the sample response bias using weights derived from the Census.  But, as you all know, we’ve lost the Census. So, our ability to do that kind of weighting is deteriorating.

2. Funding squeeze

Statistics Canada has faced substantial cuts over the past few years. Not just them, but also the policy shops in other departments like ESDC have been cut back severely. Funding for many of the big surveys—I’m thinking the NLSCY here—came in part from other departments like HRSDC. That funding is gone.

Let’s talk politics for a moment, if I may. These changes have been made by the Conservative government and we should hold them to account for the governing choices they’ve made.

But, let’s move to the other side of the House—no one on the other side is talking about increasing taxes either, and they seem to have other big projects in mind for the projected surpluses that have arisen in economic forecasts.

If no one is talking about raising taxes, the funding squeeze on federal government operations will almost surely continue no matter who is elected in 2015. Apparently, that’s what Canadian voters want or else at least one of the parties would take a different tack.

3. Supply side admin data factors.

The third trend I’d like to highlight is the supply-side factors pushing toward administrative data sets.  There are two factors here:

i Data storage and dissemination is cheaper and easier.

We’re not dealing with big magnetic tapes any more, and we don’t physically have to move to Ottawa to access data. We have memory keys with terabytes of capacity and we have data pipelines through which we can access data.

ii Number crunching and processing is much faster.

I mentioned earlier about 2 day-long data sorts that I was doing in the 1990s. I’m almost certain I could perform the same sort with a few million observations in minutes rather than days, with today’s capacity. This makes feasible the analysis of big administrative datasets.

4. Rise in methods that use admin data.

The fourth and final trend that is affecting the data world is the development and focus, at least in economics, on methods that require big, administrative data sources.

One of these methods is called Regression Discontinuity. It was developed originally by psychologists who were studying education.  One of the first papers to use the method was by Thistlethwaite and Campbell in a paper published in the Journal of Educational Psychology in 1960. The graph here shows you how this method works.

The research question was to determine the impact of winning a merit scholarship on education aspirations. Those below the threshold did not get the scholarship; those above the threshold did.

Now, there is clearly a pre-existing relationship between grades and further education aspirations. That can be seen in the upward-sloping graph.  The magic of this RD method, though, comes from the discontinuity in that relationship at the point where the merit scholarship is awarded. We can use that discontinuity to infer the impact of the scholarship.

This kind of method was adopted in economics about a decade ago and has quickly become one of the core tools used by empirical economists.

What kind of demands on the data does this method make?

• You need the exact test scores—you would lose a lot of accuracy if you relied on self-reports.
• It is data-hungry—you need a lot of observations close to the point of discontinuity. As an example, in the NLSCY you get about 200 births per month. This is simply not sufficient to use birthdate-based RD strategies. With big admin datasets, you can get thousands born on any birthdate.

Implications:

The key implication coming out of these trends is that there is a large shift going on away from survey data toward admin data. I have some evidence of this.

In the United States, there is an economic research hub called the National Bureau of Economic Research. It is run for academics and by academic; mostly can be thought of as a research centre where profs can book their grants, house and pay their research assistants, and disseminate their research.

Every summer, the NBER holds a conference called the Summer Institute. The different research groups meet over several days and see presentations of the latest and greatest research in their areas. This is really one of the premier conferences in economics—the room is stuffed with professors from top 10 schools and the editors of many top journals are there.

Over the past two years I’ve taken count of the number of papers that use surveys, administrative data, or data from experiments. Here’s what I found.

There were 19 studies in 2013 and 16 in 2014 that used administrative data. There were only 2 and 4 that used survey data.

In 2014, two of the papers that used survey data were methods papers; developing and testing methods that might be applied rather than doing applied research itself. In short, the market share for surveys at the top echelons of empirical economics has fallen to almost zero.

Why does this matter?

I think this matters a lot, for three reasons.

First, much of our whole data system is still built for surveys. From the DLI to our physical infrastructure in RDCs to our security protocols to how we do graduate student training. In all of these areas, we are not ready for a large shift toward administrative data.

Second, if Canada doesn’t keep up with this trend, we will fall behind. In the NBER Summer Institute and in top journals in recent years, the number of papers on Scandinavian data has skyrocketed. American academics didn’t suddenly get a taste for dried fish—these papers are being published because of the awesome power of the administrative register datasets that are available to Scandinavian researchers. We are losing market share. This matters because this will make it harder to attract and retain the best researchers and graduate students. If we want world-leading social scientists in Canada, they need access to world-leading tools.

Third, we will fall behind on what social science can contribute to society. Think back to the Ross Finnie paper on post-secondary education that I started with at the beginning of the talk. What wonderful insights come from that analysis! Without continued and secure access to administrative data the Canadian public will lose out on the kind of insights we can get from that kind of work. These are insights worth paying for.

Plan for the future

Those are the challenges faced by we who work with data every day. What should we do? I propose a three-pronged plan of action, all focused on redeveloping things that have been lost.  I chose ‘redevelop’  over ‘restore’ or ’rebuild’, because I think our efforts should be looking forward, not backward. We do not have a time machine; we cannot just press pause or put things back as they were in 2009, 19999, or whatever year you think was best.  The world has changed; we should incorporate those changes as we redevelop our data infrastructure.

1. Redevelop trust: a Charter of Data Practices

To work on redeveloping the public’s trust in data, I think we need a Charter of Data Practices.

Think of the trust problem from a layperson’s point of view. They hear there is a big database of information in which their personal information sits.  This kind of database can lead to large-font headline on news websites about the security of private information.  It is too hard for a layperson to understand if the data in question actually compromises their information or if it is more innocuous.

We know, as data professionals, that with certain precautions, confidentiality can be maintained.

We can ensure no names or addresses are in the data; identifiers are fully anonymized.

• We can take physical security precautions with encryption and taking care about who accesses the data and how.
• We can ensure there is a proper data management protocol for how data are stored and handled after the research project is complete.

With these kind of practices, we can maintain a healthy balance between researcher needs and individual confidentiality.

Is there a way that we can communicate how we arrive at this balance to citizens and stakeholders?

If there were some kind of standard protocol available, perhaps through a Charter of Data Practices, these communications could be improved.  If citizens had confidence in the Charter, then could simply invest their trust in projects that met with the Charter protocols without having to investigate the details of every big-font headline news story.

The Charter of Data Practices could be developed by experts in consultation with all the stakeholders to find a balance between security and privacy concerns and the real benefits that come from research. It could be funded and driven by government, or it could be a purely non-governmental initiative.  The goal is clear: forge social consensus about what where that balance between research and confidentiality should be.

Such an effort in Canada may just duplicate some international efforts about which I am unaware, but we could certainly draw on the experiences of other countries.

But I think having such a Charter would allow us improve on the status quo, where every admin data use needs to be evaluated and protocols developed de novo.

2. Redevelop the funding

The second proposal is to redevelop the support for funding data. Political parties don’t seem to be putting large efforts into making the case that good data needs real dollars. There is a good case to be made, and we should make it.

We need to do that with caution, though. One approach is to channel outrage, organize demonstrations, and use the tools of protest to fight for change. These tools have a role in society, but I must admit they don’t come naturally to me. I think they energize those who are already committed, but I’m not convinced how much they persuade those in the middle to change their minds—and in my view that should be the target.

We have a model for this. Amine Yalnizyan of the Canadian Centre for Policy Alternatives was instrumental in putting together the coalition that pushed back against the changes to the Census. These efforts could have simply become a left-wing coalition fighting against a Conservative government initiative. Instead, Armine put tremendous effort into reaching out to others in Canadian society from business groups to big banks to more pro-market thinktanks like the Canada West Foundation and the C.D. Howe Institute. Ultimately, we were not successful in stopping the killing of the Census. But in y view Armine played her cards in exactly the right way.

In my experience, there are good people in every caucus in Ottawa. MPs who care deeply about their communities; care about facts, research, and evidence.  These voices don’t always prevail in policy decisions, but I know they are there. In making the case for redeveloping funding for data, I believe we need to make a case that speaks to people of all political—and non-political—persuasions.

3. Redevelop the Census

The census is at the core of our data universe. We use it to build weights for the surveys we have. We use it to evaluate the representativeness of the admin data we have. It is the ultimate anchor for nearly everything we do with data.

We need it back.

We need it back, but I think we should allow ourselves to spend time thinking about whether we simply restore it in its 2006 form, or whether we look forward to how we might do it better. The central core that makes the census ‘the census’ is its mandatory coverage. That is the foundation. What we put on top of that, though, should be open to redevelopment.

In the UK, the Cameron Conservative-coalition government initiated an expert panel through the Office for National Statistics with the name ‘Beyond 2011’ to review how the 2021 Census in the UK might take form. Note that the planning process started 10 years in advance—these kinds of changes can’t be made on the fly. They were interested in thinking how they might use administrative data—from public or private sources—in combination or in place with traditional census-taking. I think this was an innovative and productive question to ask.

The Canadian government took some heat a year or two ago about a data project that tried to use information from the website KIJIJI to learn about labour markets.  That project was not successful, and this continues to be fodder for government critics.

I think some of this criticism is misplaced. I think we should be thinking about ways of incorporating new data sources and new techniques into our data collection system. Now, it’s important to work hard to make sure the information you get out of those sources is useable, but the effort itself should not be mocked.

The main recommendations coming out of that expert panel in the UK were to a) make greater use of existing government admin data on incomes and other information in concert with the survey instrument and b) make greater use of internet-based survey-taking methods.  As it turns out, those are both things Statistics Canada was already doing with the Census in Canada in 2006. But, I think this kind of process is one we should emulate as we push to redevelop the Canadian census.

I’d be remiss if I didn’t pay strong tribute to the efforts of Kingston and the Islands MP Ted Hsu. Dr. Hsu is sponsoring a Private Members’ Bill C-626 to restore the long-form census. While this bill is unlikely to pass in the current parliament, his efforts to keep the Census on the front-burner deserve our thanks.

Conclusion

We as social scientists have a lot to contribute to Canadian society. We can’t do that without the help of everyone who produces the data, from the survey-designers right through to the expert data librarians who help researchers find the data that meets their needs.

The trends afoot in the data world are pushing economists—and I expect other social scientists too—toward greater use of administrative data. We are not properly prepared for this change, but we need to adjust to it.

I’ve proposed a three point plan to redevelop data for the social sciences. Redevelop trust, funding, and the census. I’m very curious to hear your thoughts. Thank you.

On November 25th at about 8pm Eastern Standard Time, I will be giving the annual Benefactors’ Lecture, sponsored by the C.D. Howe Institute and the Chartered Professional Accountants of Canada.

The full lecture document will be released by the C.D. Howe Institute on Wednesday the 26th. I will post a link when that is available.

Below are my speaking notes for the lecture.

Speaking Notes

 Our tax system is based on a 1960s design that’s not well-suited for the challenges of today’s economy. There are many pro-growth reforms we should be looking at– corporate tax changes, GST reform, or even putting prices on pollution through green tax reform.

All of these improvements would make our economy more efficient and promote investment and the jobs of the future. But to build the necessary political support to get these changes through, we need to ensure Canadians have complete confidence in the fairness of our tax system.

So, with this lecture, I’m trying to start a conversation on how we can design our tax system to promote both fairness and growth.

In Burnaby BC tonight, someone may be working on a new idea that will launch a world-leading Canadian company. Maybe in five years, Google will buy her out. Give her ten years, and maybe she could buy Google.

I bet if you asked her, she might care a lot more about producing a cool product than what the capital gains tax rate will be in five years. But to get her idea out of that Burnaby basement she will need to attract financial and human capital away from their current uses. A pro-growth tax system helps get that capital where it is needed.

I’m going to start the lecture with the principles underlying our current system. I will explain why I think we’re in a New Era for Tax Policy, and the real problems it presents us. Finally, I will sketch out a three-tiered reform package that aims to reset the tax system to promote both fairness and growth.

Carter:

 Accountant Kenneth Carter spent four years working with a large staff to produce the 1966 Report of the Royal Commission on Taxation which has been a touchstone for the Canadian tax system ever since.

At the centre of Carter’s efforts was the ideal of fairness. Carter argued that a tax system required confidence across society that the tax burden was fairly distributed.

The way to do so, according to Carter, was to pool together all forms of income into a ‘comprehensive income’ measure. Alongside earnings and interest, items like capital gains, unemployment insurance, and even the family allowance were also to be included. This very broad measure of income, Carter argued, was the best gauge of the family’s ability to pay and would be the fairest base for taxation.

The premise of the lecture is that we should move beyond Carter because we’re now in a New Era, defined by two elements.

Income concentration:

The first element is the rise in income concentration at top income groups, as famously documented by economists like Thomas Piketty and Emmanuel Saez. Income concentration has emerged in countries ranging from the United States to India.

The chart shows the growth in income from 1982 to 2012 in Canada. This is individual, pre-tax, inflation-adjusted, total income. Over this thirty year period, incomes grew most sharply at the very top—150% for those in the top 0.01%, compared to just 8% growth for those in the bottom 90%. This lopsided growth pattern is consistent with the trends in other countries.

In Canada, the middle and bottom have done better over the past 10 years than other countries, and the growth of top incomes seems to have plateaued. However, these recent developments have only taken some of the edge off the broad generational trends seen in the chart.

The source of the concentrated income growth might surprise some of you—it’s mostly employment compensation. It’s not greater returns on investment, but sharply increased pay envelopes for highly-skilled employees. Piketty, in his famous book, attributes this to the advent of the “supermanager”; executives at large firms. In the United States Piketty reports that about 2/3rds of the top 0.1% of income earners are supermanagers. The same appears to be true in Canada.

The highest federal tax bracket in Canada now starts at $136,270, which is below the threshold for membership in the top 1%. This means that all the growth in the top one percent is taxed at the same marginal rate. Our system has not responded at all to the emergence of income concentration.

Efficiency costs:

The second element of the new era is an increasing awareness of the efficiency costs of taxation on the economy. At the time of the Carter Commission in the 60s, little was known empirically about how individuals and firms respond to taxation. Over the last twenty years, great progress has been made in understanding these costs.

A primary focus of the empirical studies has been the responsiveness of income to tax rates. The picture on the slide is the original drawing made by economist Arthur Laffer on a napkin in a Washington DC restaurant in 1974. The Laffer Curve emphasizes that higher tax rates lead people to take action to lower their tax liability. If such a response is large enough, it can even counteract the static revenue gain and lead to lower overall government revenue.

The importance of behavioural response to taxation is at the heart of modern thinking on tax policy. Progressive economists like Piketty, Saez, and even Krugman now adopt this framework to think about the effect of high taxes, though they believe we are far below the Laffer peak.

Top earners respond to higher taxes in diverse ways. For some, they might adjust their labour supply by taking fewer clients. For others, decisions about saving and investments may be distorted. In addition, many high earners have access to tax planning opportunities. When confronted with higher tax rates, it would be surprising to expect those with access to the best tax advice fail to heed it.

Evidence in Canada suggests that the income of high earners is quite responsive to tax rates—to the point where pushing tax rates higher than 50% in our current system gets close to the range where we might expect little extra revenue to be raised.

So, these are the two pieces of the New Era: income concentration and awareness of efficiency costs.

Why does this matter? Implications:

Why does this New Era present a challenge to Carter?

Here’s the reason: income concentration is raising concerns about fairness. But the responsiveness of top earners to higher tax rates makes it very difficult for us to raise rates to meet those fairness concerns.

So, is it a problem if we can’t raise tax rates on high earners? I think it is a problem.

The central tension is this: many growth-oriented tax reforms are held back because of concerns about fairness. Corporate tax reform to encourage investment and growth. Sales tax reform through broadening the HST base. Green tax reform to put a price on pollution. Fairness concerns impede these changes.

If we want to move to a tax system that encourages investment and growth, we need to work harder to ensure the tax system is perceived as fair by Canadians.

The solution:

The solution I propose is to break free of the constraints imposed by the Carter comprehensive income framework. Canada should move to tax income on two separate schedules.

One schedule is for employment compensation. Income from a job would be taxed progressively—perhaps moreso than today.

The other schedule is for capital income—the return on investments. Investment income would be taxed at a simple, common, flat rate.

This is called a Dual Income Tax, and has been used for 20 years in Sweden and other Nordic countries. Moving to a Dual Income Tax would require more study and take time to implement. For that reason, I’ve positioned it as the 3^rd tier of a three-tier reform package.

The first two tiers of the package set the stage for that full reform, but also stand on their own merits and could be implemented immediately. Here’s what the package looks like.

 Tier I: CLEAN the base

The first tier of reform aims to CLEAN the tax base by removing tax expenditures. The goal here is to broaden and simplify the tax base in order to increase efficiency. This may also bring in extra revenue which can be recycled into lower rates or higher bracket thresholds.

There are two targets I propose for base broadening.

The first target is ineffective tax credits. Since 2006, so-called ‘boutique’ tax credits have proliferated, allowing tax recognition of activities ranging from children’s fitness to volunteer firefighting. These credits are inefficient, and they are biased toward higher earners who are more tax-savvy.

Normally. when we raise revenue using high marginal tax rates, there is a tradeoff: we distort economic activity but we get tax revenue that can be spent on productive public projects. With boutique tax credits, we end up with the worst of both worlds—we distort decisions with higher tax rates, but the issuance of credits means that we don’t raise as much revenue.

The second target for base broadening is the taxation of stock options granted as employment compensation. Stock options make up an important part of executive compensation, which is a main driver of income concentration.

Compensation from employment should be taxed as compensation from employment—it is that simple. Currently, tax is deferred until the option is exercised and then taxed at capital gains rates in many cases. The deferral until exercise is likely unavoidable since valuing options at issuance requires an option-pricing model that might lack needed information for non-traded stock. However, taxing fully at exercise is a feasible compromise.

 Tier II: SIMPLIFY capital income taxation

The second tier of reform aims to SIMPLIFY the taxation of capital income. Canada currently has a notionally-integrated regime for dividend taxation, and partial exclusion for capital gains. In both cases, there are two motivations.

First, integration attempts to account for the fact that dividends and capital gains come from income that has already passed through the corporate tax system. Taxing those sources at full rates on the personal tax form would result in excessive taxation that would bias corporate distributions and bias organizational form choices. I think it is important to maintain recognition for corporate taxes paid.

The second reason for our current system is to ensure the resulting income is taxed on our progressive income tax schedule—this comes from Carter’s view that companies should be seen as a veil, and all tax based on personal ability to pay. I don’t think we need this anymore.

Each Canadian is now entitled to Tax-Free Savings Account contribution room of $30,500. Within a few years, very few Canadians will have any need to hold taxable assets—only the top few percent of families would have taxable assets in a ‘mature’ TFSA system.

If almost all taxable capital income goes to top-bracket earners, we can set a simple flat tax rate approximately equal to today’s integrated top tax rate for dividends and capital gains.

Capital gains are now taxed at 14.5% federally for top bracket earners, and eligible dividends at 19.3%. A common rate for dividends and capital gains in the range of 15 to 19% would work.

To be clear, the goal here is neither to substantially raise nor to lower taxation of dividends and capital gains. Instead, we can simplify the system by taxing dividend and capital gains income at a simple flat rate. This reform is worthy on its own, but also sets the stage for a full Dual Income Tax regime in the third Tier of reform.

Tier III: TRANSFORM to a DIT

The final tier of reform is a three-part transformation of the tax system.  All three parts of this 3^rd tier rely on each other; all three need to be present for it to work as intended.

The first part takes the final step toward a Dual Income Tax by moving the taxation of interest and other investment income down to the same flat rate charged on capital gains and dividend income.

The second part of the transformation increases tax rates on employment income for high earners. Today’s top federal bracket at 29% starts at about $136,000. We could add to that a bracket of 32% at $250,000 and 35% at $400,000 as possible targets.

With provincial taxes included, marginal tax rates on employment income would reach over 50% for top earners. With a cleaner more efficient tax base, we need not be as worried about behavioural response as with today’s tax base. A tax rate over 50% may strike some of you as harsh—but I think it’s necessary to build support for the other pro-growth elements of the package. That’s the tradeoff.

The third part of the transformation is a corporate tax reform to improve investment opportunities. Today’s corporate tax system favours debt, and taxes the normal return to capital investments. An Allowance for Corporate Equity system allows firms to deduct the ‘normal’ return to capital invested, meaning that the normal return on investment will not face marginal taxation.

This move beaks with the Carter ideal and improves efficiency by transforming the corporate tax system from one integrated with the personal tax system to one that taxes only excess corporate returns. To maintain revenue levels, it might be necessary to increase tax rates on the remaining corporate tax base. The aim for the resulting system is one that raises revenue efficiently while sharply improving the investment climate for Canadian corporations.

The challenges:

Any major tax reform raises challenges. Here are two.

First, we’re always concerned that high-earning professionals might push some of their compensation through a corporation rather than taking it directly as employment income.  It’s important that different routes face approximately the same taxation, but this kind of balance condition can be managed inside this reform.

Second is the concern that high earners will migrate out of Canada. Solid empirical evidence showing strong fiscally-induced migration is hard to find—but everyone has heard the stories. I don’t think we should rely on stories, but we must still be careful. If the executive market is particularly mobile then the result of taxing them at higher rates may be to increase their pre-tax pay in order to compensate them for the higher taxes. This would push pre-tax income concentration even higher.

These and other concerns need attention and further study, but we should not let the presence of some challenges derail the drive to reform. We need to weigh the bundle of problems we have now against the bundle of problems we would have to face with a new system.

 Conclusion

To sum up, Canada faces a New Era for tax policy, defined by income concentration and awareness of the efficiency cost of higher taxes. These factors constrain how our tax system responds to calls for more fairness. In turn, this holds us back from necessary and productive pro-growth reforms.

The solution I propose here is to break free from the Carter Commission framework by implementing a Dual Income Tax.

But, in case that’s too big a step to contemplate, I’ve also laid out a plan for immediate reforms to restore fairness and improve efficiency by cleaning up the tax base and simplifying the taxation of capital income.

Many Canadians are worried about the future of the middle class. Most of the economy of the future doesn’t even exist today, but will be built idea by idea, dollar by dollar, investment by investment, and job by job. To my mind, the best way to ensure we have a prosperous middle class a generation from now is to do everything we can to get people like that young woman in Burnaby to invest in her ideas.

But—and this is crucial—in order to secure support to build a pro-growth tax environment, we need first to do more to ensure that all Canadians believe our tax system is fair.

The reform package described in this lecture decisively moves us in the direction of a tax system that aims both for fairness and growth.

Thank you.

Here are some links and notes I’ve made as I prepare for today’s Cross-Country Checkup on Canada’s federal budget situation: Show details here.

Department of Finance

2014 Budget here.

Fall 2014 Fiscal Update here.

Office of the Parliamentary Budget Officer

2014 Fiscal Sustainability Report. Compares future spending and tax trends at the federal and provincial levels.

Update after October 30th tax package announcement. Changes account for about half the projected surplus; rest is one-time measures. Little extra room left for further measures.

My Analysis of Policy Options

Conservative: Family Tax Package. In Maclean’s.

NDP: Childcare. In Maclean’s; in Globe and Mail.

Liberals: Infrastructure. In Maclean’s.

Other analysis of fiscal situation

Stephen Gordon at Maclean’s argues that future surpluses depend on continued spending restraint in Ottawa. If opposition parties wants to spend more, they have to continue that restraint or raise new revenue.

My ideas for simplifying and improving our web of child benefit programs.

My ideas for long-run income tax reform in upcoming C.D.Howe speech.

Last updated: January 21, 2021.

Disclosure statement: here.

The American Economic Association has a disclosure policy for potential conflicts of interest, as does the National Bureau of Economic Research. To fulfill my obligations under those policies, I have posted my disclosure here, which is up-to-date as of January 2021.

The subject of the disclosure statement above is mainly financial, but it also included items related to political and policy activity. In this blog post I expand briefly on the political and policy activity.

From time to time, I take calls from government officials for advice on policy matters. I answer the calls when I’m able.

In the past, MPs from all three main parties have cited me as a credible reference in the House of Commons. (CPC, LPC, NDP)

I have twice served the Government of Canada through ‘Interchange’ placements. Under these agreements, I was seconded to the Government of Canada while maintaining my permanent position at UBC. In 2016 the secondment was to the Department of Finance for its review of federal tax expenditures. In 2020-201, I was seconded to the Privy Council Office to give advice on economic recovery.

Here are some FAQs regarding my disclosure statement and interactions with the media.

FAQs

1. I’m a journalist. Given what you’ve disclosed here, should I quote you?

A: That’s your decision. I disclose; you decide. You can include any of the above information you’d like, if you think your readers would appreciate it.

2. Are you a member of a political party?

A: No.

3. Do you endorse any political party?

A: No.

4. Are you a spokesperson for the government or any party? Do they speak for you?

A: No. I provide occasional advice. Politicians and officials sift that advice through their policy and political filters and come up with a position. I’m not responsible for what comes out the other side. Experts should give advice; elected representatives should make decisions.

5. Why do you comment on policy?

A: I believe my role as a social scientist in public interactions is to push the debate toward consideration of facts, evidence, and research. Very often, people complain there is too little consideration of evidence in our political system. When actors in the political system (public servants, politicians/political staff, media) reach out to me to inquire about what the research says, I’m going to take that call.

Here are some notes from my presentation at the Financial Markets Regulation Roundtable sponsored by the School of Public Policy at the University of Calgary. The Roundtable was held on June 25th in Toronto.

PDF of the presentation is here.

The presentation is based on my joint work with Tammy Schirle of Wilfrid Laurier University which can be found here.

More information on the ORPP can be found here.

Agenda

Three points to make today:

1. Is there a need for more earnings replacement?

2. Extra coverage to low earners is major design flaw

3. Regulation issues for the ‘O-PPIB’

Is there a need for ORPP?

Many middle and high earners have less than adequate income replacement rates—especially those without employment-based pension.

Is that a problem for government to solve?

• For high earners who don’t save, do we need government to ensure they can holiday in Florence instead of ‘just’ Florida?

Opinions differ, but here’s mine:

• Government can provide an inflation-indexed, jointly annuitized, guaranteed benefit at a good price.
• You can’t buy that on the market—it is good insurance.
• Some expansion can be justified to firm up the base of retirement income

Major Design Flaw: Low-Earner Coverage

• OAS and GIS mean that 95% in lowest earning quintile have >70% replacement rate.  2/3rds have >100%!

• ORPP makes these low-earners transfer more resources from now to the future.

o   They are struggling now; they are struggling less in the future.

o  This is a bad trade.

• Worse, their contributions are for a full entitlement but they only get half.

o  Why? GIS claws back half their benefit.

o  So, they are paying double for a pension they don’t need.

• Fixes? Exempt low earners. Maybe up to 25K?

Regulation of “O-PPIB” 

• Proposal allows opting out for those with “comparable workplace pension”.

o  So, we won’t be shifting money out of Teachers or OMERS and into ‘Ontario-PPIB’.

o  Imagine hugeness of CPPIB under a CPP reform that didn’t carve out existing RPPs.

• Investment policy: CPPIB has done well here; can ORPP match?

o  Provincial agreement required for amendments to CPP—hard to put hand in cookie jar.

o  The platform says both “the ORPP will be publicly administered at arm’s length from government” and that “the ORPP will be able to invest the premiums it collects in Ontario businesses and infrastructure.” Which is true?

Background Notes for Cross Country Checkup
Kevin Milligan
UBC Vancouver School of Economics
kevin.milligan@ubc.ca

March 2, 2014

—

I’m scheduled to be a guest on Cross Country Checkup with Rex Murphy at 2:30PST/5:30EST on Sunday March 2, 2014. The topic is “Does the middle-class need a better deal?”.

[Update: you can hear me with Rex at 1 hour 32 minutes, here.]

Here are my background notes, with references.

My basic argument summarizing most of this is laid out in an accessible way in this Maclean’s article.

Last week, there was an IRPP/CLSRN conference on this topic featuring a great depth of research. The slides and audio from that conference is here.

Q: What’s going on with middle class jobs?

* 30 year trend across industrialized countries: Hollowing out of job market; middle skill jobs have been shrinking. Technology is changing the job market irreversibly.
[Source:  See it in one graph here. Goos Manning Salomons AERPP 2009 or David Autor 2010 or Autor’s keynote to IRPP/CLSRN conference: slides video. Evidence on Canadian job polarization from Green and Sand.]

* Canada has been fortunate to have some factors pushing against those trends: increased participation of women and the oil boom.
[Source: for resource boom, see Fortin-Lemieux 2014. For women, see CANSIM 202-0101 graphed here on slide 4. ]

Q: What about middle class incomes?

* Median family incomes fell from 1980 to 1995, but grew from 1995 to 2011. The uptick is great news, but we have to understand what’s driving these trends.
[Source: See my Maclean’s article here, or see CANSIM numbers graphed here on slide 4.  Stephen Gordon provides an alternative view on Maclean’s here and here.]

* Male earnings on their own have been stagnating nationally. The national family income boost has been driven by women.

* Also, middle earners in oil boom provinces like Alberta and Newfoundland and Labrador have been doing very well. Ontario and BC have seen downright declines.
[Source CANSIM 202-0101, graphed here]

* Top incomes (those in the top 1% or top 0.1%) grew tremendously since the mid 1980s. They’ve given up some of those gains since 2008–time will tell if trend recovers after recession.
[Source: see CANSIM 204-0002 numbers graphed here on slide 6. 1982-2010 trends graphed here. Long-run Canadian trends are in Veall 2012. Global trends are in Atkinson, Piketty Saez 2010. Graph the global trends yourself using the Paris School of Economics Top Incomes Database.]

Q: Are the upward middle family income trends sustainable?

* Need to think about the next 25 years.

* Should we rely on Canadian women working more to drive us higher?

* Short of finding oil in Oshawa, we need to find solutions that work for all Canadians including the non-oil provinces.

* Need to think about ways to build an economy where prosperity is felt across the income distribution and across the country.

Q: What does the Statistics Canada wealth survey have to say about the middle class?
Statistics Canada release on 2012 wealth survey here.

* Overall net worth has grown–by 44.5% at the median from 2005 to 2012. This is not a bad thing. But not entirely a good thing either.

* Need to look underneath the headline–it is driven by real estate wealth.
[See my Maclean’s article here for expansion and sources for these arguments.]

* If people don’t cash out their real estate gains, this is just a paper gain for current homeowners.

* Not a sustainable source of societal wealth accumulation–next generation faces sky-high house prices. Great for today’s middle class, but how does this help tomorrow’s middle class?

Q: What are the policy solutions?

* This is driven by deep global trends; not going to reverse with a finger-snap.

* Must resist temptation to try to turn back the trade/technology clock to 1980. We still need growth; just would be better with growth that’s more broadly felt both across the income distribution and across the country.

* We know that over last 30 years the best protection has been education: vastly different trends for different education groups. On its own may not be enough, but this must be part of conversation.
[source: See Bourdarbat, Lemieux, Riddell 2010 for long-run returns to education, or Frenette 2014. Startling trends in US education returns from David Autor: graph, full slides. Some slides for a forthcoming paper by Foley and Green are here; they challenge notion that education alone will solve the problems. Beaudry Green and Sand 2013 suggest a ‘reversal’ in 2000, as higher skill workers moved down job ladder and crowded out lower skill workers. But Lindley and Machin 2013 find that in 2000s all the reversal did was slow the growth of the skill wage gap.]

* On the ‘top 1%’, best solutions are to ensure we have strong corporate governance so executive pay reflects performance. Also work hard to tighten tax loopholes so everyone pays their share.
[Source: I expand on these arguments in this presentation here. I make some tax system suggestions in Maclean’s here,]

The Iona Building, 2015 home of the VSE

As announced today, the Vancouver School of Economics will move in 2015 a few hundred metres to the Iona Building. A map is here (look for the red arrow near the top), and Google streetview is here. The Vancouver Sun story about this transaction is here.

This is a very exciting development! Below is some information about the Iona Building.

The Iona Building is currently home to the Vancouver School of Theology. The VST and its predecessor institutions have inhabited the Iona Building since its construction in 1927. The VST is affiliated with UBC, but is independent. UBC has agreed to buy out the remaining 912 years on the 999 year lease and purchase the building.  The Vancouver School of Economics will move in August 2015, after some renovations. Here is a flickr stream with more pictures.

Iona Building, looking north to English Bay

The Iona Building has several unique features, including a Maltese Labyrinth and a fine gallery of stained glass.

Maltese Labyrinth

There is a Maltese Labyrinth inlaid in the garden behind the building. According to the Outdoor Art Tour from the Belkin Art Gallery, this was installed in 2006. Here is the full description from that same source:

The octagonal labyrinth at the Vancouver School of Theology was
installed in 2006 and designed by Landscape Architects Perry and
Associates. This permanent version replaces the original, which was
set into the grass in 1997, and was the work of Rev. April Stanley,
JoAnne Tharalson, Rev. Lynne McNaughton and Ginger Shaw. This
modified design resembles in its pattern the stone labyrinth in the floor
of Chartres Cathedral in France.

Pavement or stone labyrinths are found in many twelfth century European cathedrals and churches. Labyrinths are frequently confused with mazes but serve a different purpose. A maze is a puzzle or game one attempts to solve. The labyrinth, on the other hand, is meant to mirror the spiral patterns of creation and to draw one into reflection, contemplation, or prayer. It is a singular path that leads the participant to the centre and then back out again. Walking a labyrinth can be a meditative act, a metaphor for life’s journey. Several religious traditions — Christian, Aboriginal, Eastern — have some form of walking meditation. The Maltese Labyrinth is open to all; please enjoy walking it at your own pace.

There is also some very impressive stained glass, seen here at the Institute for Stained Glass in Canada.

Stained Glass at Iona Building

With 100,000 square feet of usable space, the VSE will have the space to live up to its potential, with better possibilities for visitor offices, seminar rooms, and study space.

From 1972 until now, the Department of Economics / Vancouver School of Economics has been housed in Buchanan Tower.

Buchanan Tower

The tower is a typical example of brutalist architecture, which architect Christopher Erickson describes in the Ubyssey as:

“a purist architectural philosophy, seeking to express boldly the material of construction, usually concrete, with no adornment. The beauty was sought in the raw material.”

Another view on Buchanan Tower comes from this scene from ‘X-Men Origins: Wolverine’, in which BuTo fills in for a druglord’s lair in Lagos, Nigeria. The strange elevator ride in that scene does remind me very much of the BuTo elevators. I also recall seeing BuTo in ‘The Butterfly Effect’ with Ashton Kurcher.

View from Buchanan Tower, looking North

I think we will all miss the great views from Buchanan Tower, but myself I am looking forward to taking up residence in the Iona Building in August 2015. Congratulations to all who helped to make this deal. I also offer thanks to the Vancouver School of Theology for passing on such a fine legacy building.  I wish the VST well in the next stage in its evolution.