Key policy areas for the new finance minister: Part 3—inequality

The appointment of Bill Morneau (pictured above) as Canada’s minister of finance is particularly interesting because of his involvement in the world of public policy think-tanks. In recent years, the Fraser Institute and the C.D. Howe Institute (where Mr. Morneau recently served as Chair) have both produced important research that provides insights that can help guide the policy decisions of the new finance minister on a number of different files. This series of blog posts highlights a number of key policy areas where Mr. Morneau’s think-tank experience can be especially useful. In this post, we examine the recent research surrounding economic inequality.

In recent years, the issue of economic inequality has garnered increased attention. Some activists have claimed the existence of an “inequality crisis,” and proposed an array of populist policy responses. On these issues, Morneau would be well-served by considering recent think-tank research.

For example, a recent paper from the Fraser Institute shows that hyperbolic claims of rapidly growing income inequality are usually based on overly simplistic analyses that fail to take into account the impact of redistributive tax and transfer policies that already exist. The authors showed that when after-tax income is considered, family income inequality has only risen between 6.5 and 12.9 per cent between 1982 and 2010, a much more modest increase than suggested by more simplistic analyses that look simply at pre-tax income.

Morneau should consider this evidence and reject populist policy responses to a perceived “inequality crisis” such as higher capital gains taxes, corporate income taxes, and personal income taxes that would be harmful to Canada’s economic performance.

During the campaign, the victorious Liberals repeatedly stated that delivering pro-growth economic policy would be an important priority for their new government if elected. Prioritizing economic growth will necessarily mean rejecting economically harmful populist economic policy choices that focus primarily on redistribution. Recent research suggests that concerns over an “inequality crisis” in Canada are overblown; the new government should resist calls to focus on redistribution, and focus their attention instead on policy options that will contribute to economic expansion and all of the accompanying benefits including job creation and wage growth.

As the former chair of the C.D. Howe Institute, Morneau is surely well aware of the important research produced in recent years by his own organization and other think-tanks such as ours, which provide important insights that can help guide pro-growth economic policy—one of the central animating purposes of the recent Liberal campaign platform.

Hopefully Morneau will make use of his think-tank background and rely heavily on this research as he works to craft the government’s policy agenda.