Tuesday, March 29, 2011

Policy Choices So Far: Boo, Meh and Whaaaa?

Each of the three major parties has made one big announcement so far in the campaign.

Conservatives: "Stephen Harper's family tax cut" would allow families with children under 18 to split up to $50,000 in income. As in any income splitting scheme, this will only benefit couples where the two people are in different tax brackets. Clearly, this is a highly regressive policy since it will not benefit at all low-income and many middle-income households.

Worse, even in terms of economic efficiency, this policy's effect is at best ambiguous, and in fact probably negative. The tax cut will reduce the marginal tax rate of the first earner in some couples by effectively putting him/her in a lower bracket. But now the second person in the couple faces higher taxes on his/her labour income. For the vast majority of Canadian families, having at least one full-time earner is necessary - that person will have an incentive to work more, but there's only so much overtime you can do. However, for many couples, whether the second partner works is much more of a choice. Under the Conservative plan, there will be a strong disincentive for that person to work. As a result, the net long-term effect of this policy on the economy may well be contractionary. In any case, it is unlikely to be expansionary - which is pretty sad for a tax cut.

Think about it: a proposal that is regressive, contractionary, and costs money. Boo.

Liberals: The Canadian Learning Passport will provide $1,000-$1,500 per year for up to 4 years to students at post-secondary institutions. Before getting too excited, however, parents and youth should note that this grant replaces the education and textbook credits (the tuition credit will stay). For a full-time student, those credits are now worth $465/mo x 8 mos/yr x 15% = $558/yr, or say $500/yr after time discounting because students often don't have the income to benefit from the credit right away. Therefore, the true benefit of the Liberal proposal for most families is only about half the advertised amount.

It is unclear whether this policy is progressive: although low-income families get more per child, children from high-income families are more likely to go to university. It is also unclear whether it is economically efficient - this depends on how many more kids go to a university as a result (I'm assuming that's a good thing), and on economic distortions generated by the cost. Meh.

NDP: Wants to cap credit card interest at prime+5% (8% currently) and to regulate credit card transaction fees. Just the interest rate cap will nab something on the order of $10 billion from credit card companies. Think about how much we'll all save - a wonderful free lunch! Whaaaa?

The credit card industry may generate high profits, but it also requires lots of capital. The question is how much excess profits it generates - i.e. profits over and above what all that capital would generate if invested elsewhere. The answer is, most probably, much less than $10 billion. After all, if offering cards were that profitable, banks would be falling over each other to give cards with better terms in order to attract more customers.

If only credit cards with 8% interest and low transaction fees can be offered, then:
1. there will be a lot fewer of them;
2. those that exist will have little or no rewards, and high annual fees.
Canadians will then have two choices:
- pony up that big annual fee up front; or
- use debit, keep checking their chequing account balance to make sure balance doesn't run low, and go through the hassles and uncertainty of getting a personal loan when a little extra is needed.
My guess is that few would choose the former option, so the NDP proposal would essentially kill credit cards in Canada. Most Canadians would simply end up losing the convenience of revolving credit and probably paying a bunch of extra bank fees instead of credit card interest. The NDP is probably smart enough to know this. Part of the party may even think that getting rid of credit cards is a good thing, though I would hope that the majority is not that paternalistic. Most likely, they are banking (probably rightfully so) on enough Canadians being naïve enough to support this policy, knowing full well that they'll never get a chance to implement it.

1 comment:

Earl said...

The beauty of being Jack Layton is that you know you will never have to implement such outrageous policies. You can promise the moon because you KNOW you'll never have to deliver. The fact the the NDP makes promises like this tells us Jack Layton despite what he says, is definitely not running for Prime Minister.