DFAA Funding and New Brunswick

The Province of New Brunswick has incurred millions of dollars in damages to highways, bridges, and other critical infrastructure this spring and there are currently over 75 road closures throughout the province, some more severe than others, and the timeline for repair remains uncertain. Many individuals have also suffered losses related to flooding from snowmelt and heavy rains. Yet, while weather is uncontrollable, it is necessary to ask whether the government could have taken steps to lessen the extent of damage. If they could have, it becomes more important to ask why it did not.

The Department of Transportation and Infrastructure’s budget had declined in years past. In 2013, the departmental budget was $272,296,000–although the Department spent $284,265,000–and grew roughly 0.5 per cent in 2014 to $273,447,000. There are several concerns about the Department’s budget, which funds construction, maintenance, and repairs, with some expressing concern about the state of provincial infrastructure and how to improve it.

Though the province has other financial obligations, the risk of damage from spring weather is perennial and poorly maintained infrastructure is very costly to repair. There is another political element, however, that determines how provinces allocate money in their budget: federal transfers.

Ottawa’s Disaster Financial Assistance Arrangements (DFAA) has provided the provincial governments with $2.5 billion since inception in 1970 and eligible expenditures include damage to public infrastructure from natural disasters. The federal government allocates funds using a per-capita cost-sharing formula and the provinces are eligible for assistance once damages exceed $750,000.

Rural provinces like New Brunswick have a lower threshold before the federal government steeps in to help cover the cost of repairs because the funding uses a per-capita formula. They also have a very high ratio of infrastructure-to-population, which could theoretically incentivize them to allocate less in their budget to keeping infrastructure in good condition. Even though preventative measures help avoid some of the devastating effects of weather-related damage, the provincial government may benefit from spending less on infrastructure and using financial aid from the federal government instead. Furthermore, the fund covers damages to private property and compensates individuals for damage to their houses or land, creating more incentive issues. For instance, some individuals have received financial assistance multiple times and critics are questioning whether it is wise to subsidize living in risky areas. This is why it is important to look deeper into the DFAA program and analyze how it influences provincial expenditures, which also entails asking whether it is the best program for assisting the provinces during crises.

Rachel Lowe is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

What is the Negative Income Tax?

Taxation and welfare are, perhaps, two of Canada’s most contentious economic issues. In fact, popular discourse suggests that one’s stance regarding taxation and welfare serves as a litmus test for basic philosophical predisposition. Repeatedly, for instance, talk of a ‘negative income tax’ appears in the national conversation. The dearth of economic and political understanding about what this entails, however, typically results in its dismissal.

Well, what is the negative income tax (NIT)?

In essence, the NIT is a subsidy that roughly equals jurisdiction’s poverty line. Low-income individuals, for instance, would receive a net payment and those earning larger incomes would contribute a net payment. This implies that the benefit would equal the contribution at some level of income between the lowest and highest quintile.

Imagine a situation in which everyone over the age of 18 receives a basic income of $20,000, above which the tax rate on earned-income is 50%. That is, the government taxes $0.50 for every dollar earned in addition to the benefit. Someone earning $10,000 a year, for example, would pay $5,000 in taxes, after which the level of basic income would decrease to $15,000 and their total income would amount to $25,000. The tax effect on someone earning $40,000 a year is neutral, such that the amount of taxes levied would equal the amount of the basic income.

The moment an individual’s income rises above $40,000, however, they cease being an NIT-recipient and, instead, begin contributing to the government’s coffers. As demonstrated by the hypothetical above, the NIT is progressive, despite the 50% flat tax rate on additional income. For instance, someone earning $60,000 would contribute $30,000 in taxes, for a total annual income of $50,000, whereas someone earning $80,000 would contribute $40,000 in taxes, for a total income of $60,000. The respective taxes rates in each case are 16.6% and 25%.

For the mathematically inclined, the formula for total income is I=(b+[n*f]), where b represents the basic income, n represents earned-income above b, and f represents the flat tax rate that applies to n. The formula for the effective tax rate is T={[b+(n*f)]+n}*{-1}/n.

Such a policy is not without a history in Canada. In the 1970s, for instance, the federal government and the Manitoban government joined forces and implemented a trial NIT in Dauphin, Manitoba. The experiment, dubbed Mincome, observed the NIT’s effect on labour markets, poverty, and several additional economic variables. Unfortunately, however, Ottawa did not conduct an impact-assessment and Mincome’s valuation depends on anecdotal evidence.

Additionally, the 1985 MacDonald Commission proposed a pseudo-NIT–the Universal Income Security Program–which would have replaced a swath of federal and provincial welfare programs. Nevertheless, policymakers dismissed the recommendation.

In any case, the NIT implies fewer harmful disincentives to work than current taxes, welfare programs, and regulations. Furthermore, the NIT would allow the federal government to scrap a number of existing policies that create unintended consequences, foster equitable outcomes, and alleviate poverty. In future entries, I will make a normative case for this policy using the blueprint established in this piece and show that implementing a NIT is not only recommendable, but also feasible in the Canadian context. 

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Accountability and ‘Idle No More’

Chief Theresa Spence, the unofficial face of the Idle No More Movement, has brought unprecedented national attention to aboriginal issues.  But what issues exactly?  Chief Spence’s own inarticulate answers to inquiries as to allocation of funds, and the generally vague statements by protesters and representatives alike (official and unofficial), has hindered rather than helped any distinguishable cause, which after sifting through many statements can be anything from enforcing or changing treaty rights, increasing funding, or Bill C-45 (whose putative negative effects on reserves are debatable).

There are many fundamental problems at the root of Idle No More, least of all the romantic notion of the hunters and trappers robbed of their traditional way of life by oppressive European conquerors.  To focus around one aspect that seems to be the root of many issues, Idle No More is a mess of accountability.  The most apparent accountability issue is the embarrassing lack of documentation for millions of dollars (reportedly over $120 million over the past six years) to Theresa Spence’s reserve of Attawapiskat, the publicity of which has certainly been to the detriment of other well-organized reserves. This is at best incompetence and at worst corruption, keeping in mind that whether or not there was proper bookkeeping on the reserve, any consultants, lawyers or contractors would have issued receipts for their work.  Anyone can sympathise with demands for clean water, safe housing, and proper schools in any Canadian community.  But when millions of taxpayer dollars directed to these needs evaporate unaccounted for, the Canadian government must examine fundamental problems before giving into threats and providing more money to perpetuate unsustainable environments.

There is a lack of accountability as to who has responsibility for what.  Specific problems have been highlighted in education, healthcare, and infrastructure on reserves.  Nationally, these are under provincial jurisdiction.   But the funding of reserves is under federal jurisdiction, and the reserves are given the right to operate fully independently by the Indian Act.  The funding comes from the federal government and is controlled by the band leaders and councils.  Thus the reserves have control over standards in the sectors mentioned and the funds to facilitate them (Canada provides about $11billion to reserves annually, according to Aboriginal Affairs Canada).  As a result, standards concerning financial reporting and auditing vary widely.  Here there is a lack of transparency that can facilitate the unethical behaviour of authorities, allowing chiefs and band leaders to pay themselves inordinate salaries and allocate funds inefficiently and irresponsibly.  Again, this is not the case on all reserves. The media attention to this is to the detriment of well-organised reserves using their funding more efficiently, as well as those who have engaged with other Canadian communities to their economic benefit, especially in the field of resource development.

There is an accountability issue with housing specifically. Reports of decrepit low-quality housing on reserves are rampant.  On the reserves themselves, the communal land ownership model means that no individual owns their house.  This means that they do not have responsibility for it, nor can they benefit from it by selling or leveraging equity.  Here there is a contradiction between community rights under section 35 of the Indian Act, and individual rights and responsibilities in the Canadian Charter of Rights and Freedoms.  Many, including the Canadian Taxpayer’s Federation, advocate giving reserves full control over their land, and provide other recommendations to increase prosperity among Aboriginal people.

But perhaps most basically, native reserves, especially remote reserves, are communities without an economy.  Not economically viable, they cannot function like sovereign nations, which they hold ideal, as they are dependent on government funds to survive. Misdirected handouts have not helped anyone rise quickly out of poverty.  Others may be at fault for poor conditions on reserves, but projecting blame and perpetuating victim rhetoric does not directly address key issues that need to be surmounted. Dependency and autonomy cannot exist together.  Accountability and self-sufficiency are all that can lead to success.

-Stami Zafiriou