Minimum Wage: A tax by another name?

By Christopher Sallie
AIMS on Campus Fellow

Income inequality has become a topic for debate across Canada, as we begin to feel the impacts of declining oil prices on the average household income. Maritime governments are coming under increased pressure to address this issue and increasing the minimum wage appears to be the preferred solution.

But will such a policy achieve the desired outcome? The quagmire that is minimum wage best embodies the need for sound policy during a time of sluggish economic growth. Half-measures such as this may have an adverse impact, as it fails to address the underlying issue relating to income inequality: taxation.

Proponents of increasing the minimum wage well argue that addressing income inequality may improve the most vulnerable in our society by offering them a wage that allows them to meet their most basic needs. Opponents to such proposals believe the raising of minimum wages will put a drag on small and medium business in an already fragile economy, and say that addressing matters of tax reform would be a far more effective means in increasing take home pay. On this matter, we would be wise to listen to the opponents on this issue.

The Basic Personal Exemption (BPE) is the earnings threshold that both levels of government set when determining what an individual may earn without having to pay taxes. The Atlantic provinces have some of the lowest BPEs in the country. When compared to those of the Western provinces, in some instances the BPE threshold is almost twice as high as their eastern counterparts. The reluctance of provincial governments to increase these amounts is a testament to the composition of their respective labour forces. They know well that any increases in the BPE will have a negative impact on government revenues, forcing them to make unpopular decisions come March and putting their political ambitions at risk.

In October 2015, the PEI branch of the Canadian Federation of Independent Business was asked to speak to a Legislative Committee about the impacts of wage increases and presented some troubling findings. In their report, they found that “there have been substantial increases to the minimum wage while no adjustments have been made to the tax system. The result has been that the effective rate of personal income tax paid by a full-time minimum wage earner has grown from 3.4% in 2002 to 5.7% in 2014”.

It is clear that this type of policy fails to improve the disposable income of low income earners. By ignoring the impacts such a policy on small- and medium-sized businesses, and their ability to invest in growth through increased payroll taxes, failure to address tax fairness on full-time, minimum-wage earners would make any minimum wage increase irrelevant.

Benefits of the CETA Trade Deal for Atlantic Canada

By Salman Dostmohammad
AIMS on Campus Fellow

Negative public sentiment towards free trade deals in the U.S. is placing political pressure on the US-Canadian partnership. For Canada to sustain its economic prosperity, it is vital to diversify trade relations with other partners and reduce our dependency on the U.S.  The ratification of the Comprehensive Economic Trade Agreement (CETA) between Canada and the European Union (EU) will strengthen both economies and increase Canada’s prosperity.

The EU is composed of 28 member states and home to 500 million people with annual economic activity of almost $18 trillion. CETA is a big deal for Canada as the EU is the world’s largest importing market for goods. Annual imports alone are worth more than Canada’s entire GDP. Thus CETA provides tremendous opportunities for Canadian businesses and exporters. A joint EU-Canada study found that CETA may bring a 20% boost in bilateral trade and a $12 billion annual increase to Canada’s economy. CETA also stands to benefit Atlantic Canada directly as the EU is the second largest export destination for the region.

The signing of CETA is a “game changer” for the region. Before CETA, Canada’s seafood industry was at a competitive disadvantage compared to competitors in Norway, Iceland and others when seeking access to the EU market. CETA will eliminate over 98% of tariffs on imported merchandise from Canada. This will create a level playing field for Canadian producers and processors of the seafood, forestry and agricultural industries to compete more effectively. CETA will have benefits not just for industries in Atlantic Canada but from coast to coast to coast such as Canadian farmed salmon, arctic char in the Yukon and oysters on the Pacific coast.

There is large support for CETA in the region. This includes the Prince Edward Island Potato Board, Nova Scotia Fish Packers Association, New Brunswick Forest Products Association, Maritime Lumber Bureau, Halifax Port Authority, Lobster Council of Canada, and more.

The agreement will provide the following benefits for the region:

  • Increased cargo activity through the Port of Halifax as a result of increased trade volumes.
  • Greater opportunities for Atlantic Canadian businesses to expand, compete and invest for growth that will benefit workers and create more jobs.
  • Duty free access to the EU fish and seafood market for fishermen.
  • The 8% duty on shipped lobsters will be eliminated, making local lobster products more competitive in Europe.
  • Reduction on tariffs for agricultural products which can potentially increase sales, growth and prosperity for the agricultural sector.

All of this will mean new jobs and greater prosperity for Atlantic Canadians.

A flawed, demand-side response, to supply-side problems

By Justin Hatherly
AIMS on Campus Fellow

The fiscal deficit for the current fiscal year is likely to exceed $30 billion, well above the $10 billion initially forecasted.  The surge in deficit spending has been justified as necessary to boost an economy still reeling from the collapse in oil prices.  However, such a response is likely to do little to revive the Canadian economy, as it fundamentally misunderstands the root causes of our economic malaise.

When faced with a nominal (demand side) shock, it is theoretically possible that expanded government borrowing can support an economy by boosting both public and private investment and consumption. However, the fall in oil prices is not a nominal problem, and instead represents a structural, supply side shock to the productive capacity of our nation.

The fall in oil prices means that Canada has suffered a deterioration in our terms of trade.  That is, for any given level of demand for our oil, we will obtain a lower level of income than at a higher price level. This means that investment in the oil and gas sectors has suddenly become less profitable. As the rate of return on investment in oil and gas declines, we are faced with a long term, painful restructuring in which labour and capital are reallocated. In our current circumstances, the Canadian economy is not operating below potential; it is instead operating at close to full capacity given the decline in our potential growth rate.

Fiscal stimulus can do nothing to change this reality. Instead, it will only serve to further misallocate scarce resources.

This is not to say that there is nothing the government can do to improve our economic prospects.  It instead implies that supply side reforms rather than demand side stimulus are key to reviving economic growth in Canada.

To boost our long-term growth potential, the federal government should instead focus on spurring productivity growth by making Canada a better place to invest.  This could entail policies such as lower marginal tax rates on labour and capital, scaling back interprovincial barriers to trade, and deregulating industries with artificial, government imposed, barriers to entry such as transportation.

Fiscal stimulus will fail to improve an economy wrought with difficulties that are supply side in orientation.


This blog is part of our AIMS on Campus Fellows program. Please visit http://www.aimsoncampus.com for more information.