Fraser Forum - June 2010

Fraser Forum

June 2010 $3.95

A Fraser Institute review of public policy in Canada

Ontario’s drug pricing debacle Health reform in Quebec

Canadian Publication Mail Sales Product Agreement Number 40069269.

Drug delays in Canada

From the editor

Fraser Forum Publisher Chief Editor Managing Editor Editorial Advisor Coordinating Editor Contributing Editors Art Direction and Cover Design Cover Photo Production and Layout Media Relations Advertising Sales

Fraser Institute Brett J. Skinner Kristin Fryer Kristin McCahon Mark Rovere Peter Cowley Charles Lammam Niels Veldhuis Bill Ray iStockphoto Kristin Fryer Dean Pelkey Advertising In Print Tel: (604) 681-1811 E-mail: info@advertising inprint.com

The Fraser Institute’s vision is a free and prosperous

world where individuals benefit from greater choice, competitive markets, and personal responsibility. Our mission is to measure, study, and communicate the impact of competitive markets and government interventions on the welfare of individuals. Founded in 1974, we are an independent Canadian research and educational organization. Our work is financed by tax-deductible contributions from thousands of individuals, organizations, and foundations. In order to protect its independence, the Institute does not accept grants from government or contracts for research..

For additional copies, or to become a supporter and receive Fraser Forum, write or call the Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC V6J 3G7 Telephone: (604) 688-0221; Fax: (604) 688-8539; Toll-free: 1-800-665-3558 (ext. 580–book orders; ext. 586–development) Copyright © 2010 Fraser Institute ISSN 0827-7893 (print version) ISSN 1480-3690 (online version) Printed and bound in Canada.

Return undeliverable Canadian addresses to: Fraser Institute, 4th Floor, 1770 Burrard Street Vancouver, BC V6J 3G7 The contributors to this publication have worked independently and opinions expressed by them are, therefore, their own and do not necessarily reflect the opinions of the supporters, trustees, or other staff of the Fraser Institute. This publication in no way implies that the Fraser Institute, its trustees, or staff are in favour of, or oppose the passage of, any bill; or that they support or oppose any particular political party or candidate.

Fraser Institute Board of Trustees Peter Brown (Chair-

man), Edward Belzberg (Vice Chairman), Mark W. Mitchell (Vice Chairman), Salem Ben Nasser Al Ismaily, Louis-Philippe Amiot, Gordon Arnell, Charles Barlow, Jr., Ryan Beedie, Brad Bennett, Everett Berg, T. Patrick Boyle, Joseph Canavan, Alex Chafuen, Derwood Chase, Jr., James Davidson, John Dielwart, Stuart Elman, Greg Fleck, Paul Fletcher, Shaun Francis, Ned Goodman, John Hagg, Paul Hill, Stephen Hynes, Robert Lee, Brandt Louie, Lukas Lundin, David MacKenzie, Hubert Marleau, James McGovern, George Melville, Gwyn Morgan, Eleanor Nicholls, Roger Phillips, Herb Pinder, R. Jack Pirie, Conrad Riley, Gavin Semple, Rod Senft, Anthony Sessions, Christopher Shackleton, Bill Siebens, Anna Stylianides, Arni Thorsteinson, Michael Walker, Catherine Windels, Brett J. Skinner (President), Peter Cowley (Senior Vice President, Operations), Michael Perri (Secretary-Treasurer)

Y

ou wake up one morning feeling just awful. Your throat is sore, your nose is all stuffed up, and you’re running a high fever. In other words, you’re sick. And with those symptoms, you’ve probably got the flu.

As most of us know, being sick isn’t fun. There is both a direct physical cost—i.e., feeling sick and all that that entails—and an indirect personal cost—i.e., not being able to go about your life as normal.

When you’re sick, you are limited in what you can do. Forced to stay at home and rest, you often miss out on social events and fall behind in your work.

But the costs are even greater when you consider how your being sick might affect others. Because of your absence, your co-workers may need to put a project on hold, causing a delay that may disappoint a client and create stress for you when you return. And if a family member has to stay at home to look after you, then the impact of your illness will be multiplied. Sickness often has a kind of “trickle down” effect.

As we look at Canada’s health care system in this issue of Fraser Forum, I am reminded of that trickle down effect. As many Canadians have observed, all is not well with our health care system—and, as a result, all Canadians are suffering. Many of us wait weeks, if not months, for surgery, millions of us do not have a family doctor, and we pay more for our prescription drugs, on average, than do consumers in other countries, including the United States.

Yet our governments keep spending more and more on health care. As Fraser Institute research indicates, current spending levels are not sustainable. Over the last 10 years, government health spending has outpaced revenue growth in six of the 10 provinces. If the situation is to improve, serious changes must be made.

Fortunately, some Canadian politicians have recognized that reform is necessary. In his most recent budget speech, Quebec’s health minister, Raymond Bachand, admitted that the province’s health care system is in serious financial trouble and is “unsustainable in the long term” (“Health reform in Quebec,” pg. 19). As a result, the province is proposing two major financial reforms: a new health care tax and a deductible for medical visits. The new tax will not solve Quebec’s funding problem, but the deductible is a step in the right direction.

Meanwhile, in Ontario, the government is also making some major changes. Recognizing that Canadian generic drug prices are among the highest in the world, Ontario has announced that it will regulate their price, fixing them at 25% of the price of the original brand name drug (“Ontario’s generic drug pricing debacle,” pg. 16).

As Mark Rovere and Brett Skinner note in this issue of Forum, the government’s policy is misguided, but it is encouraging to see that Ontario has finally acknowledged that generic prices are a problem.

Rovere and Skinner suggest that, instead of fixing prices, the government should focus on creating a system that produces lower prices through market-based competition.

Canada’s health care system may be plagued with problems, but it’s not a hopeless case. With some smart, market-based reforms, our system could be one of the best in the world.

Kristin Fryer (kristin.fryer@fraserinstitute.org)

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Contents 8

Government spending

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From the editor

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Forum authors

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It’s time to simplify the tax code Niels Veldhuis When all of the costs associated with preparing tax returns are added up, it costs Canadians between $4 billion and $5.8 billion annually to comply with personal income tax regulations.

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Does economic freedom enhance stock market returns?

Kamal Smimou and Amela Karabegović

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New research indicates that developing nations need economic freedom, the foundation of a market economy, to encourage stock market development and growth.

Interview with Tom Flanagan

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Talk is cheap Charles Lammam, Niels Veldhuis, Milagros Palacios, and Alex Gainer In preparation for June’s G20 Summit in Toronto, Prime Minister Stephen Harper recently urged member countries to begin focusing on reducing government deficits. But as Canada’s deficit continues to grow, Mr. Harper would be wise to take his own advice.

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11 Generic drug prices

Fraser Forum June 2010

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Property plight Professor Tom Flanagan shares his thoughts on the property plight of the First Nations and how Canada can unlock a new era of Aboriginal prosperity.

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HEALTH CARE REFORM IN CANADA

Another unnecessary task force Charles Lammam and Niels Veldhuis The federal government’s new Task Force on Financial Literacy will likely be a waste of taxpayers’ money.

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Quarterly Research Alert Our researchers summarize the findings of recent studies on important topics, including tax policy, political economy, charitable giving, immigration, poverty, and labour market policy.

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Ontario’s generic drug pricing debacle Mark Rovere and Brett J. Skinner Ontario’s goal should not be lower drug prices through arbitrary government mandates; instead, the province should focus on creating a system that produces competitive prices.

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Health reform in Quebec Mark Rovere Recognizing that the current funding model for its health care system is unsustainable, Quebec is proposing two major financial reforms: a new health care tax, which the government has euphemistically dubbed a “health contribution,” and a deductible for medical visits.

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Drug delays in Canada Mark Rovere Canadians who are dependent on provincial public drug programs would have better access to new prescription drugs if public plans were replaced with a competitive private sector drug insurance market.

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Forum Authors Alex Gainer (alex.gainer@fraser

institute.org) is a Research Economist in the Fiscal Studies Department at the Fraser Institute. He holds an M.A. in economics from the University of British Columbia.

Amela K arabegović (amela.kara

begovic@fraserinsti​t ute.org) is a Senior Economist in the Fiscal Studies department at the Fraser Institute. She has an M.A. in economics from Simon Fraser University.

Charles L ammam (charles.lam​ mam@fraserinstitute.org) is a Policy Analyst in the Fiscal Studies Department at the Fraser Institute. He is completing an M.A. in public policy at Simon Fraser University.

M ilagros Palacios (milagros. palacios@fraserinstitute.org) is a Senior Economist with the Fraser Institute’s Fiscal Studies Department. She holds an M.Sc. in economics from the University of Concepcion in Chile.

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M ark R overe (mark.rovere@ fraserinstitute.org) is Associate Director of the Health Policy Research Centre at the Fraser Institute. He holds an M.A. in political science from the University of Windsor.

Brett J. Skinner (brett.skinner@ fraserinstitute.org) is the President of the Fraser Institute and the Director of Health Policy Research. He obtained his Ph.D. in public policy and political science from the University of Western Ontario.

Kamal Smimou is an Assistant Professor in the Faculty of Business and Information Technology at the University of Ontario Institute of Technology.

Niels Veldhuis (niels.veldhuis@ fraserinstitute.org) is the Director of Fiscal Studies and Vice President, Canadian Policy Research, at the Fraser Institute. He has an M.A. in economics from Simon Fraser University.

It’s time to simplify the tax code

Fotolia

A flat tax would save Canadians’ time and money

Niels Veldhuis

N

ow that the income tax deadline has passed, Canadians can relax, knowing they have almost a full year before they have to tackle another tax return. For many Canadians, tax season is a time of stress and anxiety.

All the different forms, receipts, and calculations—it’s enough to give anyone a headache.

Each year, we’re forced to sweat, stress, and spend hours complying with the tax system. It’s time for the government to address the complexity of Canada’s income tax system.

A recent study, The Cost to Canadians of Complying with Personal Income Taxes, by François Vaillancourt, professor of economics at the University of Montreal, used the results of a survey of 2,000 Canadian tax filers, carried out by Leger Marketing on behalf of the Fraser Institute, to calculate the enormous costs Canadians face in order to comply with income tax regulations.

Despite the widespread use of computers over the past 20 years and increasingly simpler software programs such as QuickTax, the

number of Canadians using paid help to complete and file their income tax returns continues to rise.

The survey found that 51% of Canadian tax filers use a paid tax preparer (e.g., accountant, lawyer, or firm such as H&R Block) to prepare and submit their tax returns. In 1986, only 39% of tax filers used paid help.

Only 31% of Canadian tax filers prepare their returns themselves, while 18% rely on friends, family, or a non-profit organization.

The survey also found that Canadians spend an average of five hours gathering receipts and forms, preparing, meeting with tax professionals, and/or completing their tax returns. When time spent on tax planning and appealing Canada Revenue Agency or Revenue Québec decisions is included, Canadians spend an average of seven hours complying with personal income taxes. In addition, Canadians spend an average of $61 on payments to tax professionals and purchasing tax software.

All told, it costs Canadians about $215, on average, to comply with personal income tax

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regulations when all the costs, time, and effort associated with preparing tax returns are included. Compliance costs are highest (above $300) for those receiving self-employment income, rental income, capital gains, or foreign investment income. In addition, married tax filers were found to have higher compliance costs ($253) than single tax filers ($168) (Vaillancourt, 2010).

Unfortunately, the tax system seems to be getting more complicated and more costly, partly because of the litany of tax credits that have been introduced over the past few years, including the Canada Employment Credit, Child Tax Credit, Textbook Tax Credit, Children’s Fitness Tax Credit, Public Transit Tax Credit, temporary Home Renovation Tax Credit, and First Time Home Buyers’ Tax Credit. While Canadians might like the idea of receiving a tax break for the different types of activities they undertake, such as putting their kids in sports, it substantially increases the costs of compliance. continued on page 10

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iStockphoto

Does economic freedom enhance stock market returns?

K amal Smimou and Amela K arabegović

O

ver the past couple of years, capitalism has repeatedly been blamed for the financial crisis of 2008 and the subsequent economic downturn.

Judging from all the media coverage on the issue, many people agree with that conclusion. However, a recent paper published in the Emerging Markets Review, titled “On the Relationship between Economic Freedom and Equity Returns in the Emerging Markets: Evidence from the MENA Stock Markets,” provides empirical evidence to the contrary (Smimou and Karabegović, 2010). The paper finds that capitalism—notably, the free market system—is not detrimental to stock markets; instead, it is a prerequisite for stock market development and performance.

The paper examines the impact of economic freedom (i.e., a proxy for capitalism) on stock market performance in 11 Middle Eastern and North African (MENA) nations: Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Saudi Arabia, Tunisia, Turkey, and the United Arab Emirates (UAE).

Economic freedom’s impact on stock markets Economic freedom is measured by the Economic Freedom of the World Index, published by the Fraser Institute in an annual publication titled Economic Freedom of the World.1 The foundations of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of private property. In other words, economic freedom measures the extent to which individuals and families are free to make their economic decisions regarding where to work, what to buy, what to sell, where to invest, and so on. The Economic Freedom of

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the World Index is based on 42 different components or indicators, which are grouped into five broad categories: (1) size of government; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labour, and business.

Economic freedom has both direct and indirect impacts on stock market performance. Economic freedom may directly deter stock market development and performance through restrictions on capital flows and transaction costs (i.e., restrictions on freedom to trade financial instruments such as stocks and bonds), which are part of a broader measure of economic freedom. Indirectly, economic freedom both attracts investment and makes it more productive. A high level of economic freedom improves the business environment by not only strengthening the rule of law and enforcement of contracts, and thus eliminating any potential uncertainty regarding expropriation, but also by making businesses more dynamic and efficient through the elimination of unnecessary barriers and hurdles that are usually associated with high levels of red tape. A nation that has no restrictions on capital flows but has high taxes, a high level of red tape, and lacks a robust rule of law (i.e., it fails to enforce contracts or to protect private property) may still fail to attract investment. To fully benefit from stock market liberalization, a nation must eliminate restrictions on capital flows and create proper economic policies that encourage stock market development.

The impact of economic freedom on economic growth and development has been studied extensively.

The research indicates that economic freedom is a key driver of economic development.2 However, the relationship between a broad measure of economic freedom and stock market development and performance has not

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been studied as extensively. This has started to change recently; however, the MENA region has almost always been overlooked.

The goal of the recent Emerging Markets Review paper was to fill this gap. The level of economic freedom, as well as the level of restrictions on capital flows that are part of the fourth area of economic freedom (freedom to trade internationally), differs quite substantially among MENA nations. For example, the Saudi Arabian stock market only allows its bank shares to be purchased by Gulf Cooperation Council (GCC) members, but not by other foreigners (Bley, 2007).3 In contrast, Egypt, Lebanon, Morocco, and Turkey allow 100% ownership by foreigners. The remaining MENA nations fall somewhere in the middle, allowing only partial ownership, ownership of certain firms, and/or ownership by GCC members only (Bley, 2007). Similarly, United Arab Emirates has one of the highest levels of economic freedom (ranking 19th out of 141 nations worldwide) in the MENA region, whereas Tunisia and Morocco each have a very low level of economic freedom, ranking 90th and 104th worldwide, respectively (see Gwartney et al., 2009). This diversity among the MENA nations allows us to study whether the difference in economic freedom levels among the nations has a significant impact on stock market returns.4

Results The study found that increases in economic freedom have a positive impact on stock market returns. Specifically, the study found that a 1% increase in the overall level of economic freedom increases stock market returns by about 3%. Moreover, the study also looked at the impact of the five areas of economic freedom and found that the second area, legal structure and security of property rights, had the most significant impact on stock market returns.

This is not surprising since a lack of rule of law—for example, the inability to enforce contracts or protect private property—makes the benefits of capital flows, and trade in general, limited.

The paper looked at the period before the current financial crisis, i.e., from 2000 to 2007. The precise causes of the financial crisis are yet to be identified and confirmed in empirical studies. So far, a number of culprits have been established, though it is not certain to what extent each has contributed to the crisis. While it is true that economic freedom makes stock markets more integrated with the rest of the world and thus may make them more vulnerable to financial crisis outside of the market, research shows that, without economic freedom, stock market development and growth cannot take place. It is difficult, if not impossible, to find a nation with a developed and dynamic stock market that has a low level of economic freedom.

Conclusion Developing nations need economic freedom, the foundation of a market economy, to encourage stock market development and growth. A lack of rule of law, high levels of red tape, and capital controls impede the development of dynamic stock markets. The study in the Emerging Markets Review provides a road map to policy makers in developing nations by shedding light on which institutions and policies have an effect on stock market performance.

Notes 1 The Economic Freedom of the World and Economic Freedom of the Arab World reports can be found at www.freetheworld. com.

2 A sample of academic papers examining the relationship between economic freedom and economic growth and development can be found at www.freetheworld.com.

3 Members of the Gulf Cooperation Council (GCC) include Saudi Arabia, Bahrain, Kuwait, Oman, Qatar, and the United Arab Emirates (UAE).

4 To our knowledge, there are two commercial investment funds that are based on economic freedom: the Index of Economic Freedom 2007 Fund and the World Freedom Select Fund. The former fund is based on the economic freedom index published by the Heritage Foundation and is offered by First Trust Portfolios; the latter fund is based on the Fraser Institute’s Economic Freedom of the World report and is offered

by Sanderson and Stocker (Lawson and Roychoudhury, 2008).

References Bley, Jorg (2007). How Homogenous Are the Stock Markets of the Middle East and North Africa? Quarterly Journal of Business and Economics 46, 3: 3–26.

Gwartney, James D., and Robert Lawson, with Joshua C. Hall; with Herbert Grubel, Jakob de Haan, Jan-Egbert Sturm, and Eelco Zandberg (2009). Economic Freedom of the World: 2009 Annual Report. Economic Freedom Network.

Lawson, Robert A., and Saurav Roychoudhury (2008). Economic Freedom and Equity Prices among US States. Credit and Financial Management Review 14, 4 (Fourth Quarter): 25–35.

Smimou, Kamal, and Amela Karabegović (2010). On the Relationship between Economic Freedom and Equity Returns in the Emerging Markets: Evidence from the MENA Stock Markets. Emerging Markets Review 11, 2: 119–51.

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p a e h c Talk is iStockphoto

Canadian governments need to cut spending and eliminate deficits Charles Lammam, Niels Veldhuis, Milagros Palacios, and Alex Gainer

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n preparation for June’s G20 Summit in Toronto, Prime Minister Stephen Harper recently urged member countries to begin focusing on reducing government deficits, saying, “We must quickly turn our attention to the next major issue facing our countries and the G20 as a whole, that is, the issue of restoring our public finances” (CBC News, 2010, May 17).

Unfortunately for Canadians, the prime minister has not followed his own advice. By 2014/2015, federal spending will be $30.6 billion (11.4%) higher than it is today. To finance the ever-expanding federal budget, the government plans to run deficits totalling $104.6 billion over the next five years.

And it’s not just the federal government. Most provincial governments have also refused to cut spending in order to eliminate budget deficits and restore balance.

It’s time for Mr. Harper and his provincial counterparts to lead by example by reining in government spending and balancing their budgets.

Last year (2009/2010), the federal government and all 10 provincial governments recorded budget

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deficits totalling $87.8 billion.1 That trend is expected to continue this year (2010/2011) with Canadian governments running another $80.9 billion in deficits. Over the course of just two years, Canadian governments have put us $168.7 billion further into the hole.

While not all Canadian governments provide projections beyond 2010/2011, those that do are expecting further deficits. For example, the federal government is expecting to be in the red until 2014/15. Ontarians can expect provincial deficits until 2016/2017. Manitoba and New Brunswick are planning for deficits until 2013/2014, while Quebec, British Columbia, Newfoundland and Labrador, and Nova Scotia are projecting deficits until 2012/2013.

Of course, temporary deficits can be expected during a recession when revenues decline and spending on certain social programs such as Employment Insurance automatically increase.

But that is not what’s driving government deficits in Canada. The Canadian economy is no longer in recession and is well on the road to recovery. The economy grew by 0.2% in the third quarter of 2009, and by

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another 1.2% in the fourth quarter (Statistics Canada, 2010). The Bank of Canada and major private sector banks are forecasting positive economic growth for Canada and all the provinces during 2010 (see, for example, Bank of Canada, 2010).

This positive economic news is reflected in the revenue projections of the federal and provincial budgets.

All Canadian governments, with the exception of Saskatchewan, are expecting an increase in government revenue this year (2010/2011). In addition, most Canadian governments are expecting 2010/2011 revenues to either meet or exceed their 2008/2009 levels.

In fact, only provinces that rely heavily on natural resource royalties (Newfoundland and Labrador, Saskatchewan, and Alberta) are expecting 2010/2011 revenues to be significantly below 2008/2009 levels.

Even in those provinces, the situation could improve substantially if a better than forecasted economic outlook boosts revenues.2 So if the economy and government revenues are rebounding, why are deficits continuing?

The reality is that Canadian governments have failed to rein in

Figure 1: Percentage change in total government spending, 2008/2009 to 2010/2011 ON FED NL NB PEI MB QC NS BC AB

21.8 17.5 10.6 9.5 7.5 7.4 6.9 6.1 6.1 5.6

SK -5%

-2.2

0%

5%

10%

15%

20%

25%

Sources: Federal and provincial budgets (various); Canada, Department of Finance, 2009; calculations by authors.

Deficit as a % of GDP, 2010/2011

Figure 2: Percentage change in total spending (2008/2009 to 2010/2011) and deficit as a percentage of GDP in 2010/2011 3.5 FED

3.0 NB

2.5 2.0 1.5 1.0 SK

-5%

0.5 0%

ON

AB QC BC NS

PEI MB

5%

NL

10%

15%

20%

25%

Percentage change in total spending, 2008/2009 to 2010/2011 Note: Deficits include forecast allowances and reserves, before any fund transfers are made to compensate for deficits.

Sources: Federal and provincial budgets (various); Canada, Department of Finance, 2009; calculations by authors.

spending (figure 1). For example, if the Ontario government delivers on its budget for 2010/2011, spending will have increased by an astonishing 21.8% in just two years (2008/2009 to 2010/2011). During the same period, federal spending will have increased by 17.5%.

Of course, some governments have shown much more restraint than others. In fact, the Western provinces have led the way in terms of spending restraint. Saskatchewan

plans to decrease spending between 2008/2009 and 2010/2011 by 2.2%, while Alberta expects modest spending growth of 5.6% and British Columbia expects an increase of 6.1%. It seems that the Western provinces have chosen not to rely on disproven Keynesian theories that government spending can help boost an economy.

With revenues rebounding, it should come as no surprise that the big spending governments are also

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those that expect the largest deficits (figure 2). The Ontario government, which has enacted the largest spending increase, expects the largest deficit as a percentage of GDP (3.3%) in 2010/2011. Not far behind is the federal government (second to Ontario in spending increases) with a deficit of 3.1% of GDP. On the other hand, the Saskatchewan government, which has reduced spending, is expecting the smallest deficit: 0.3% of GDP in 2010/2011.

Thus, the simplest way to eliminate deficits quickly is clear: government spending must be cut. Five or more years of deficits and wasteful government spending will burden Canadians with higher government debt and increased interest payments.

The sooner governments get their fiscal houses in order, the sooner they can refocus on improving Canada’s ability to attract investment and create jobs. And that should be done by reducing taxes, rather than increasing government spending.

Prime Minister Harper might believe that he has the moral authority to advise others to cut their deficits, but his government has shown an unwillingness to address its overspending—the real culprit behind the expected $105 billion in deficits over the next five years.

Rather than preach to the leaders of the G20 countries about addressing their deficits, Mr. Harper and his provincial counterparts should show them the way.

Notes 1 A budget deficit is defined as a shortfall in total revenues to cover total spending (including forecast allowances or reserves) and before any fund transfers are made to compensate for deficits.

2 Governments have a history of delivering conservative revenue estimates so it is possible that revenues in 2010/2011

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could be higher than projected for many governments.

References Alberta, Ministry of Finance (2010). Budget 2010: Striking the Right Balance – 2010-13 Fiscal Plan. <http://www. finance.alberta.ca/publications/ budget/budget2010/fiscal-planoverview.pdf>.

Bank of Canada (2010). Monetary Policy Report (April 2010). Bank of Canada. <http://www.bankofcanada.ca/en/ mpr/pdf/2010/mpr220410.pdf>.

British Columbia, Ministry of Finance (2010). Budget and Fiscal Plan: 2010/11 – 2012/13. <http://www. bcbudget.gov.bc.ca/2010/bfp/2010_ Budget_Fiscal_Plan.pdf>.

Canada, Department of Finance (2009).

Fiscal Reference Tables (October 2009). <http://www.fin.gc.ca/frttrf/2009/frt09_e.pdf>.

Canada, Department of Finance (2010).

Budget 2010: Leading the Way on Jobs and Growth. <http://www. budget.gc.ca/2010/pdf/ budgetplanbudgetaire-eng.pdf>.

CBC News (2010, May 17). PM Urges G20 Leaders to Cut Deficits.

It’s time to simplify the tax code continued from page 5 When all of the costs associated with preparing tax returns are added up, it costs Canadians between $4 billion and $5.8 billion annually to comply with personal income tax regulations (Vaillancourt, 2010).

It doesn’t need to be this way. If Canada adopted a flat tax, Canadian taxpayers could complete and file their taxes in about five minutes on a simple, postcard-sized tax form. In 2007, Alvin Rabushka, internationally renowned tax expert and University of Stanford professor, developed just that: a 15% flat tax and a postcard-sized tax return for Canada (Rabushka and Veldhuis, 2008).

A flat tax would simplify Canada’s tax code by eliminating nearly all of the deductions, exemptions, and credits that complicate the current tax system. For individuals, only a few basic calculations would be needed to determine the amount of tax owing or refund due.

Now that Canadians have finished grappling with our unwieldy and complicated tax code, littered with exemptions for special interests, we have the opportunity to give some thought to simplifying the tax system.

Replacing Canada’s personal and business income tax system with a flat tax would save us money, make everyone’s taxes easier to calculate, and strengthen the Canadian economy.

References Rabushka, Alvin, and Niels Veldhuis (2008). A Flat Tax for Canada. In Jason Clemens (ed.), The Impact and Cost of Taxation in Canada: The Case for Flat Tax Reform (Fraser Institute): 145–86.

Vaillancourt, François (2010). The Cost to Canadians of Complying with Personal Income Taxes. Fraser Institute. <http://www.fraserinstitute.org/ researchandpublications/publications/7300.aspx>.

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<http://www.cbc.ca/politics/story/ 2010/05/17/harper-g20-cuts-appeal. html>.

Manitoba, Ministry of Finance (2010).

Manitoba Budget 2010. <http://www. gov.mb.ca/finance/budget10/pap ers/budget.pdf>.

New Brunswick, Ministry of Finance (2010). Main Estimates 2010-2011. <http://www.gnb.ca/0160/budget/ buddoc2010/ME2010-11_Final.pdf>.

Newfoundland and Labrador, Ministry of Finance (2010). Estimates of the Program Expenditure and Revenue of the Consolidated Revenue Fund 2010-11. <http://www.budget. gov.nl.ca/budget2010/estimates/ estimates2010.pdf>.

Nova Scotia, Ministry of Finance (2010).

Estimates and Supplementary Detail for the Fiscal Year 2010–2011. <http://w w w.gov.ns.ca/finance/ site-finance/media/finance/budget 2010/EstimatesAndSupDetail201011.pdf>.

Ontario, Ministry of Finance (2010).

2010 Ontario Budget: Budget Papers. <http://www.fin.gov.on.ca/ en/budget/ontariobudgets/2010/ papers_all.pdf>.

Prince Edward Island, Ministry of Finance (2010). Estimates of Revenue and Expenditures 2010. <http:// www.gov.pe.ca/budget/2010/esti mates.pdf>.

Quebec, Ministry of Finance (2010).

2010-2011 Budget: Budget Plan. <http://www.budget.finances.gouv. qc.ca/Budget/2010-2011/en/docu ments/BudgetPlan.pdf>.

Saskatchewan, Ministry of Finance (2010). Saskatchewan Provincial Budget 10-11: Estimates. <http://www. finance.gov.sk.ca/default.aspx?

DN=edff b244-348a-4aa8-9d323940437923c6>.

Statistics Canada (2010). National Income and Expenditure Accounts: Data Tables (Fourth Quarter 2009).

Statistics Canada. <http://www. statcan.gc.ca/pub/13-019-x/13-019x2009004-eng.htm>.

Property plight T

om Flanagan, Fraser Institute senior fellow and political science professor, and André Le Dressay, authors of Beyond the Indian Act: Restoring Aboriginal Property Rights, made a keynote presentation at the Fraser Institute’s annual Harold Walter Siebens Lecture and Luncheon on May 6 in Vancouver. Joined

by C.T. (Manny) Jules, chief commissioner of the First Nations Tax Commission and former Kamloops Indian Band chief, the panel discussed their proposal for establishing widespread property rights and fee-simple title on Indian reserves. Professor Flanagan spoke to Fraser Forum following the presentation, offering his thoughts on the property plight of First Nations and how to unlock a new era of Aboriginal prosperity.

Interview by Kendal Egli

Fraser Forum: Canada’s Indian reserves, which total nearly three million hectares, are owned by the Crown and administered under the Indian Act. What kind of property rights currently exist for residents of reserves?

Tom Flanagan: It is a system of quasi-property rights for individuals. First, there are customary rights, which are merely based on usage and cannot be enforced in court. Second, there are certificates of possession, which are provided for in the Indian Act and can be enforced in court; however, these can only be sold to members of the same band, making the resale market so limited that they are not good investment vehicles. Then there are leaseholds, which are also provided for in the Indian Act; they can be sold, but, by nature, they are temporary, and when they get close to their termination point, there is a lot of uncertainty about renewal, which can radically decrease their value.

Fraser Forum: In your book, you propose going “beyond the Indian Act” and transferring ownership of reserve lands to Aboriginals. What does your plan entail?

Flanagan: Our First Nations Private Property Ownership Act would be supplementary to the Indian Act; it is not a repeal of the Indian Act, and it is not even an amendment.

It would create a different property rights regime that First

Nations could opt in to, if they wished. This regime would entail a transfer of the ownership of the reserve land to the community as a whole, and would also authorize the creation of individual titles for members of the community, but that would be decided at the local level.

Fraser Forum: How would the First Nations benefit from this?

Flanagan: The key is housing. There is a shortage of housing on almost every reserve in the country because there is not nearly enough private investment in housing on Indian reserves. The reason for that is lack of ownership. On most reserves, homes are owned by the band and allocated under what is almost like a Soviet system.

If you make ownership possible, then investment will follow, leading to an increase in both the quantity and quality of reserve housing. An increase in the value of

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housing will provide collateral for people who want to borrow money for other reasons. We also think it will expedite larger economic projects on reserve lands; some of these take place now, but they are very difficult and time-consuming to arrange. Projects will be easier to coordinate if the band actually owns its own land.

Fraser Forum: What is the current development process for reserve lands?

Flanagan: It is a miracle that anything ever gets done, to be honest—the procedure is so cumbersome. For major projects, typically it would involve a head lease to a developer, who would then issue subleases to residents or business premises. The head lease has to be negotiated between the developer and representatives of the band, but representatives from all levels of government will probably be involved because reserves typically do not have adequate infrastructure—roads, water, sewerage, electricity—meaning that you have to make arrangements for a neighbouring municipality to provide water and sewer, and for the province to build a road. Then, after all the negotiations, typically you have to hold a referendum of the band membership to approve designation of land for leasing. Finally, the leasing has to be approved by the Minister of Indian and Northern Affairs.

Fraser Forum: About how long does this process take, compared to developing off reserve?

Flanagan: It takes at least four times as long to get a major project off the ground, and that means it is also more expensive because time is money.

Fraser Forum: Some would point to large-scale developments like casinos as evidence that the First Nations are already prospering under the current system.

Flanagan: Some are. The Westbank Band of British Columbia was mostly divided a long time ago into certificates of possession (CP), and CP holders have made their own bargains with real estate developers. Close by, the Osoyoos reserve has taken more of a collective approach under the leadership of the chief, who has gone into business and brought in winemakers, hotel operators, and so on. And there are other good-news stories around the country. This shows that it is possible for reserves to make progress under the Indian Act, but if you look at all these successful cases, you find that they have had really outstanding leadership. Our proposal will help facilitate this kind of progress for First Nations under ordinary leadership.

Fraser Forum: Do First Nations support your proposal?

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C.T. (Manny) Jules speaks at the Fraser Institute’s annual Harold Walter Siebens Lecture and Luncheon on May 6

Flanagan: Yes, Manny Jules has met with several who have expressed interest in it. I have received positive comments from a number of Aboriginal people who have attended book promotion events. Others say they are interested but have reservations of various kinds. Importantly, nobody has rushed out to condemn our proposal.

I think this a good sign that Aboriginal people are at least looking at the idea.

Fraser Forum: What kind of concerns have First Nations expressed?

Flanagan: Loss of land is the main concern. It is a new idea that somebody other than a band member could own land on a reserve. I believe you have to learn to distinguish individual ownership from governmental jurisdiction, and the fact that somebody who is not a member of the First Nations owns a piece of land does not remove that land from the jurisdiction of the First Nations government. We are not expecting to persuade all, or most, or even many First Nations to go down this path; we just think there are some that want to, and we hope they will get a chance to try it.

Fraser Forum: Have you received any feedback from political parties or governments regarding your proposal?

Flanagan: The Minister of Indian and Northern Affairs knows what we are doing and he is open-minded about

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it. As far as other parties go, I had a conversation about it with Gilles Duceppe; he said, “Yes, why not?” Behind the scenes, Liberals such as Paul Martin are said to be looking favourably upon the idea. The vibrations that we are picking up from all parties up to this point are positive.

Fraser Forum: What obstacles do you see preventing the implementation of widespread property rights and feesimple title on reserves?

Flanagan: Simple inertia. This is a radical change, in principle. We are trying to do it in a gradual, non-threatening way, but there is natural human caution at work.

The Department of Indian and Northern Affairs is going to be somewhat conflicted about it; there are a lot of people who work for the department whose careers are built on managing the assets of First Nations, and if First Nations manage their own assets, the department will have to be downsized, I suppose. And then there is the difficulty of getting legislation passed at any time—there is only so much time in Parliament, and it is particularly difficult to pass legislation in a minority Parliament.

There are a lot of pitfalls along the way.

Fraser Forum: How much does it currently cost to administer the Indian Act? Flanagan: The Indian and Northern Affairs budget is something like $10 or $11 billion. The amount that is transferred to First Nations (and of course there are monies from other departments too; almost all departments have some kind of Indian programming) is somewhere around $8 to $10 billion. I think it is important to realize that those transfers will not stop even if First Nations assume ownership of their own lands. First Nations are, for all practical purposes, mostly like rural municipalities; they are small local governments and, in the Canadian system, local governments are largely supported by senior governments. They raise some of their own revenue through property taxes, but it is senior governments that have the main tax powers: income taxes, sales taxes, and so on. So a lot of the money that is spent by Indian Affairs is to support local services that somebody would have to pay for, like education, health care, road construction, justice enforcement, and so forth. Our proposal is not an attempt to claw back the Indian Affairs budget; rather, it is an attempt to make people’s lives better and to make them more prosperous. I think, ultimately, that will decrease things like the welfare budget.

Fraser Forum: Can you point to any international examples where such an attempt to establish widespread Aboriginal property rights has been successful, or failed?

Flanagan: We are not aware that this has ever been done before. The Dawes Act, passed by the US Congress in 1887, was an attempt to break up Indian reserves, put an end to any kind of tribal government, and to integrate the Indian population into the general American population. The basic idea was that each family would get 160 acres and any surplus land would be sold. It was thought to be a once-for-all solution. A lot of land was sold, and it produced quite a complex land-owning situation in American Indian reserves. But it did not break up the reserves; tribal identities did continue, and that policy was repealed in the 1930s.

We have studied this case very carefully because we do not want to repeat that experience. The US approach was top-down; Congress passed it without any consultation with Indians, whereas ours is a First Nations-led proposal, and Manny Jules is going to bring requests from First Nations directly to the minister.

Secondly, the US approach was compulsory, but what we are proposing is a system of voluntary procedures that First Nations can opt in to.

Thirdly, and very importantly, we see the continuation of First Nations governments as essential because they will be the agents that are responsible for providing the services and infrastructure that will increase the value of their land.

Fraser Forum: How soon could the changes you propose be implemented?

Flanagan: Even under the best circumstances, it will be several years. Hypothetically, if Manny Jules, this year, can find a handful of First Nations that want to go ahead and request the minister to act, then the legislation will have to be drafted. That will take several months, maybe a year, because it is complex legislation. Then it would have to be introduced into Parliament, and in minority Parliaments there is always a possibility of election or prorogation. Even at best, we are talking three or four years, but probably longer.

Fraser Forum: We have talked about how your proposal would benefit First Nations. How would it benefit Canada?

Flanagan: As Canadians, we become better off when our fellow citizens are better off. If people on Indian reserves prosper, we all prosper. They will be buying more things that are produced by Canadians. There will be jobs on the reserves that can be filled by Canadians.

Value will be created through whatever gets built on reserves. The economy is not a zero-sum game; it is a positive-sum game, and everybody benefits simultaneously.

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Another unnecessary task force

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New Task Force on Financial Literacy likely to be a waste of taxpayers’ money Charles Lammam and Niels Veldhuis

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his April, the federal government’s new Task Force on Financial Literacy began consulting with Canadians in order to develop a national strategy to better educate us on how to manage debt, save, invest, prevent financial fraud, and plan for retirement (Task Force on Financial Literacy, 2010a, 2010b).

While there is no question that financial literacy is an important life skill, there are already several options available for Canadians to learn about financial matters. Another “national strategy” will simply divert more money from the pockets and savings accounts of Canadians.

The main reason for the growing concern about how Canadians manage their budgets and save for retirement was the significant decline in stock market values in 2008.

Although the stock market has rebounded strongly and retirement portfolios are recovering, the financial crisis and the recession have provided an arresting reminder to Canadian families about the importance of wise financial decision-making.

Fortunately, research shows that Canadians generally make smart financial decisions. As Jack Mintz, professor at the University of Calgary and research director of the government’s Research Working Group on Retirement Income Adequacy, discovered, “claims that most Canadians are not saving enough are based on assertions or faulty studies. Recent evidence suggests most Canadians make pretty good decisions for themselves” (Mintz, 2010, Feb. 17). In addition, the Working Group found that “the Canadian retirement income system is performing well,

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providing Canadians with an adequate standard of living upon retirement” (Mintz, 2009).

Despite these findings, Finance Minister Jim Flaherty launched the Task Force on Financial Literacy after it became clear to him that “a lot of people don’t understand the fundamentals of finance” and that a “cohesive national strategy” was needed (Perkins, 2010, Apr. 14; Canada, Department of Finance, 2009a).

However, as previously stated, many options already exist for Canadians who want to improve their financial literacy. For example, there are hundreds, if not thousands, of books aimed at improving financial literacy and educating people about important financial decisions, many of which are available at local libraries and bookstores. Books like Rich Dad, Poor Dad, The Wealthy Barber, and Richest Man in Babylon provide basic introductions to financial management and offer advice on how to manage a household budget, how much income to save, the power of compounding interest, how and when to finance large purchases like cars and houses, and the choice between variable and flexible mortgage rates.

For those seeking more advanced advice, equally helpful titles, such as The Intelligent Investor, The Future for Investors, and Stocks for the Long Run, are also available. These can help guide decisions on where and how to invest savings and how to create and structure financial portfolios.

In addition, every bank and credit union in the country offers free advice pamphlets on everything from household budgets to lease/buy decisions. Canadians can

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also seek professional advice from financial advisers at their local bank or financial institution. They can attend formal seminars held by successful financial managers or even hire professionals who specialize in financial and portfolio management. Interestingly, research by University of Toronto professor Dilip Soman shows that people are more likely to follow financial advice when they actually pay for it (see Perkins, 2010, Apr. 14).

If Canadian governments truly want to help us save more, then leaving more money in our pockets and improving incentives to save would be a much better way forward. Consider that the average Canadian family is now forced to hand over 42% of its income to government in taxes (Palacios and Veldhuis, 2010). Reducing the tax burden and improving incentives to save (i.e., increasing RRSP and Tax-Free Saving Account thresholds and lowering marginal tax rates on investment income) would be a good place to start.

Before calling into question the financial knowledge of Canadians, the federal government should take a hard look in the mirror. Its own track record on managing the country’s finances is questionable. Government program spending has increased at an average rate of 7.4% since 2005/2006, well beyond the rate of economic growth (3.2%) and inflation plus population growth (2.5%) (Canada, Department of Finance, 2009b, 2010; Statistics Canada, 2005, 2009a, 2009b; calculations by authors). The federal government also plans to accumulate $105 billion in debt over the next five years (Canada, Department of Finance, 2010). Worse still, the federal government’s Old Age Security (OAS) program, the “cornerstone” of Canada’s retirement income system, has an unfunded liability of $356 billion (Palacios et al., 2008).1 The government is hardly a model of financial success that Canadians should emulate.

Canadians do not need another task force or national strategy. We already have ample resources to enhance our financial knowledge. What Canadians really need is to be able to keep and save more of their hard-earned incomes.

Note 1 Government program obligations such as the OAS are either paid out of general government revenues or have dedicated funding sources (i.e., payroll taxes). If, at any point, one of these programs has a shortfall between the future stream of funding and future obligations, it has an unfunded liability.

References Canada, Department of Finance (2009a). Minister of Finance Launches Task Force on Financial Literacy. News release

(June 26). Government of Canada. <http://www.fin.gc.ca/ n08/09-067-eng.asp>.

Canada, Department of Finance (2009b). Fiscal Reference Tables (October 2009). Government of Canada. <http:// www.fin.gc.ca/frt-trf/2009/frt09_e.pdf>.

Canada, Department of Finance (2010). Budget 2010: Leading the Way on Jobs and Growth. Government of Canada. <http://www.budget.gc.ca/2010/pdf/budgetplanbudgetaire-eng.pdf>.

Mintz, Jack M. (2009). Summary Report on Retirement Income Adequacy Research. Government of Canada, Department of Finance. <http://www.fin.gc.ca/activty/pubs/pension/ pdf/riar-narr-BD-eng.pdf>.

Mintz, Jack M. (2010, February 17). Stop Pension Panic. Financial Post. <http://www.financialpost.com/scripts/Story. html?id=2573711>.

Palacios, Milagros, and Niels Veldhuis (2010). The Canadian Consumer Tax Index, 2010. Fraser Alert. Fraser Institute. <http://www.fraserinstitute.org/Commerce.Web/product_ files/canadian-consumer-tax-index-2010.pdf>.

Palacios, Milagros, Niels Veldhuis, and Kumi Harischandra (2008). Canadian Government Debt 2008: A Guide to the Indebtedness of Canada and the Provinces. Fraser Institute. <http://www.fraserinstitute.org/commerce.web/product_ files/CanadianGovernmentDebt2008.pdf>.

Perkins, Tara (2010, April 14). Jim Flaherty: Lessons from Mother. Globe and Mail. <http://www.theglobeandmail. com/globe-investor/investment-ideas/investor-education/ jim-flaherty-lessons-from-mother/article1533813/>.

Statistics Canada (2005). Population Projections for Canada, Provinces and Territories 2005-2031. Catalogue No. 91-520XIE. Statistics Canada.

Statistics Canada (2009a). The Consumer Price Index (November 2009). Catalogue No. 62-001-X. Statistics Canada. <http://www.statcan.gc.ca/pub/62-001-x/62-001x2009011-eng.pdf>.

Statistics Canada (2009b). Demographic Estimates Compendium 2008. CD-ROM. Catalogue No. 91-213-SCB. Statistics Canada.

Task Force on Financial Literacy (2010a). Task Force on Financial Literacy Kicks-Off Public Consultation Sessions across Canada. News release (April 6). <http://www. financialliteracyincanada.com/eng/media/news-releases/ 2010-04-06.001.php>.

Task Force on Financial Literacy (2010b). Leveraging Excellence: Charting a Course of Action to Strengthen Financial Literacy in Canada. Task Force on Financial Literacy. <http://www.financialliteracyincanada.com/documents/ Consultation_Report.en.pdf>.

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Ontario’s generic drug pricing debacle Price fixing is not the answer Mark Rovere and Brett J. Skinner

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ntario has announced that it will regulate the price of generic drugs, fixing them at 25% of the price of the original brand name drug (Ontario, Ministry of Health and Long-Term Care, 2010a). This policy is a misguided reaction to the fact that Canadian generic drug prices are among the highest in the world. It is good that Ontario has finally acknowledged that generic prices are a problem, but the government’s solution is all wrong.

Canada’s Drug Price Paradox, the Fraser Institute’s annual study of generic drug prices, compares the retail prices of the 100 most commonly prescribed brand name and generic drugs sold in Canada to an identical group sold in the United States. The findings of the most recent study (2008) are generally consistent with previous reports.

According to our most recent analysis, generic drug prices in Canada were, on average, 78% higher than American prices in 2003, 115% higher than American

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prices in 2006, and 112% higher than US prices in 2007.

Therefore, in 2006 and 2007, Canadians paid more than twice as much as Americans did, on average, for identical generic drugs.

Lower generic drug prices in the United States have encouraged Americans to use generic drugs at a much higher rate than Canadians. Generic drugs accounted for 54.3% of all prescriptions dispensed in Canada in 2009, compared to 75% in the United States (IMS Health Inc., 2010; IMS Health Inc. Canada, 2010).

If generic drug prices in Canada were as low as American drug prices, Canadians would have a greater economic incentive to substitute lower cost generic drugs for their relatively more expensive brand name versions at the much higher rates observed in the United States.

This would provide significant savings for consumers and taxpayers. However, this would require considerable reforms to current policies in Canada.

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The existing reimbursement arrangement is the real problem Generic drug prices are high in Ontario, and in Canada more generally, because provincial policies restrict and distort competitive market forces that would naturally regulate drug pricing (Skinner and Rovere, 2008).

The real cause of high prices is that the Ontario Drug Benefit Plan (ODB) directly reimburses pharmacies instead of consumers. The ODB is the province’s publicly funded drug program1 which accounts for 45% of total prescription drug costs in the province. ODB recipients must pay a small, flat surcharge to a pharmacy when they have a prescription filled, and that is all. The pharmacy dispenses the drug and is reimbursed by the government for the full cost of the drug provided, plus a mark-up and dispensing fee (Ontario, Ministry of Health and LongTerm Care, 2010b).

This reimbursement scheme insulates consumers from the proportional cost of the drugs they use, encouraging overuse and reducing incentives for comparative shopping, which would put downward pressure on drug prices.

In addition, the ODB reimburses pharmacies for generic drugs at a fixed percentage of the cost of the original brand name drug. The government currently reimburses pharmacies at a rate of 50%; under the new plan, this rate will drop to 25%. This means that if the original brand name drug costs $1, then once the patent expires and generic copies enter the market, the government will pay pharmacies 25 cents for the generic drug.

This system is problematic because, under fixed percentage reimbursement, retail pharmacies have no incentive to compete on prices to win sales. Every pharmacy simply charges the maximum price allowable under the ODB reimbursement scheme, resulting in a single market price that is much higher (on average) than what prices would be if consumers were reimbursed directly and were exposed to part of the cost of their prescription drugs (Skinner and Rovere, 2008).

The current reimbursement system also allows generic drug makers to offer significant price rebates to retailers in exchange for a monopoly on sales. In other words, since the government reimburses pharmacies at the Ontario Drug Benefit price, and this price is known well in advance, drug manufacturers are able to negotiate lower prices with retail pharmacies for exclusive

distribution (shelf-space). The monopoly on sales (exclusive distribution) also allows pharmacies to force the same high prices paid by the ODB onto private buyers.

Importantly, since pharmacies are reimbursed directly by the ODB, the rebates offered by manufacturers to pharmacies do not produce net savings on overall drug spending because the discounts are kept as windfall profits by retailers and are not passed on to consumers.

In the past, other provincial drug programs have followed ODB reimbursement rates, meaning that the consequences of Ontario’s new policy will reverberate across Canada. In fact, a number of provinces are closely monitoring Ontario’s new policy proposals as they are also keen on reforming their respective provincial drug policies (McDowell, 2010, May 7).

The potential impact is significant because a large proportion of drug expenditures in Canada are financed by public drug programs. The most recent data from the Canadian Institute for Health Information shows that about 45% of total prescription drug expenditures in Canada were publicly financed in 2009 (CIHI, 2010).

In other words, these policies affect both consumers and taxpayers, neither of whom are able to take advantage of the significant savings that would be possible if generic drug prices were determined by market forces instead of government regulations.

More government: the wrong solution In response to inflated prices for generic drugs, the Ontario government has imposed arbitrary price controls.

As mentioned earlier, in 2006, the government passed legislation (Bill 102) stipulating that generic drugs could not be priced at more than 50% of their original brand name equivalent. Prior to the compulsory price cut, generic drugs in the province could not be priced at more than 70% of the original brand name price. According to the Ontario Ministry of Health and Long-Term Care, the 2006 reforms resulted in over $1 billion in savings (Ontario, Ministry of Health and Long-Term Care, 2010a).

Now, after recognizing that Ontario consumers are still paying too much for generic drugs, the government has imposed an even lower fixed price—25% of the brand name equivalent—and extended the new price to private sector sales. The government claims that the new reforms will save the Ontario Drug Benefit Plan more

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than $500 million annually (Ontario, Ministry of Health and Long-Term Care, 2010a). However, Fraser Institute research has shown that a more competitive market in the United States produces generic drug prices that are often less than 25% of brand name prices south of the border, suggesting that, in many cases, even greater savings could be achieved if prices were determined by market forces (Skinner and Rovere, 2008).

Ontario’s approach may even negatively affect the supply of generic drugs and retail pharmacy services in the province. In the absence of a competitive market, there is just no way to know what the appropriate price is.

The practical solution Ontario’s goal should not be lower drug prices through arbitrary government mandates; instead, the province should focus on creating a system that produces competitive prices. The optimal way to ensure that consumers receive the best value for the money they spend on prescription drugs is for governments to permit consumer demand to determine drug supply and prices.

The ODB could achieve this objective by reimbursing consumers directly and requiring consumers to pay a portion of the cost of their prescription drugs. For example, the ODB could use a more common approach to insurance and retroactively reimburse recipients directly for 75% of the cost of any prescription drug they purchase. Under this model, ODB recipients would be responsible for purchasing their prescription drugs at full price, and would then submit their receipts to the government for reimbursement. ODB recipients would become sensitive to price and thus would be motivated to shop around, creating incentives for pharmacy retailers to compete on prices. The pharmacies would no longer have an incentive to enforce a single price in the market because they would have to pass any rebates received from generic manufacturers down to consumers in the form of discounted prices.

This simple reorganization of public reimbursement is a win-win solution because it would incentivize generic drug manufacturers and retail pharmacies to lower their prices, increasing demand for and use of cheaper generic alternatives, thus benefiting consumers and taxpayers. At the same time, the most competitive drug makers and pharmacy retailers would win increased consumer sales.

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In addition, this market-based approach would improve consumer choice. If this new reimbursement model were applied to all types of drugs, brand name and generic, then there would be no need for political interference in consumers’ drug choices through restrictive public formularies.

The Ontario government should not try to fix a problem created by government intervention in the market by imposing more government regulations.

Note 1 ODB recipients include Ontarians aged 65 and older, residents of long-term care homes, and residents receiving social assistance. In addition, under the Trillium Drug Program, the ODB provides coverage for Ontario residents with high drug costs in relation to their household income (Ontario, Ministry of Health and Long-Term Care, 2010b).

References Canadian Institute for Health Information [CIHI] (2010).

Drug Expenditure in Canada 1985 to 2009. CIHI. IMS Health Inc. (2010). IMS Health Reports US Prescription Sales Grew 5.1 Percent in 2009, to $300.3 Billion. News release (April 1). IMS Health Inc. IMS Health Inc. Canada (2010). IMS Health Reports Canadian Retail Prescriptions Dispensed Grew 5.5 Percent in 2009, Fueled by Generics. News release (April 1). IMS Health Inc. Canada.

McDowell, Adam (2010, May 7). Ontario’s Generic Drug War May Spread. National Post.

Ontario, Ministry of Health and Long-Term Care (2010a).

Reforming Ontario’s Drug System. News release (April 7).

Government of Ontario. <http://news.ontario.ca/mohltc/ en/2010/04/expanding-access-to-affordable-drugs.html>.

Ontario, Ministry of Health and Long-Term Care (2010b).

Ministry Programs: Ontario Drug Benefit Program. Government of Ontario. <http://www.health.gov.on.ca/en/ public/programs/drugs/funded_drug>.

Skinner, Brett J., and Mark Rovere (2008). Canada’s Drug Price Paradox 2008. Fraser Institute Digital Publication. Fraser Institute.

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Health reform in Quebec iStockphoto

La belle province’s new health deductible proposal is a step in the right direction Mark Rovere

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ith its 2010 budget, the government of Quebec signalled that it plans to take the province’s health care system in a new direction. Recognizing that the system’s current funding model is unsustainable, the province is proposing two major financial reforms: a new health care tax, which the government has euphemistically dubbed a “health contribution,” and a deductible for medical visits. The first reform is effective as of July 1, 2010; the second reform is still under consideration. Combined, these reforms are expected to raise $1.5 billion over the next four years (Bachand, 2010).

The government’s recognition that the current health care system is unsustainable is an encouraging sign. Quebec’s health care system requires significant reforms, and introducing user fees for medical services is a step in the right direction. However, creating a new health care tax is not a sustainable solution.

According to the most recent edition of Paying More, Getting Less, an annual Fraser Institute study that

measures the sustainability of provincial government health spending in Canada, Quebec is one of six provinces where government health care spending is projected to consume half of all available provincial revenues by 2034 (Skinner and Rovere, 2009). Over the most recent 10-year period observed in our study (1999/2000 to 2008/2009), government health expenditures in Quebec grew at an average annual rate of 6.9%, compared to 5.1% for total available revenues and 4.4% for gross domestic product (figure 1).

Quebec’s finance minister, Raymond Bachand, recently acknowledged that the provincial health care system is in serious financial trouble.

In his most recent budget speech, he admitted that “the current situation is unsustainable in the long term” (Bachand, 2010: 20).

The new health tax Recognizing that the province’s financial outlook is not good, especially in terms of health care

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funding, in March Finance Minister Bachand announced the introduction of a new general “health contribution” that will come into effect in July (Bachand, 2010). This new contribution will apply to all adults living in Quebec, except those with low incomes, and will be collected when residents file their annual income taxes. According to the finance minister, the contribution will be $25 (per person) in 2010, $100 in 2011, and $200 in 2012 (Bachand, 2010). These contributions will be placed into a dedicated health fund.

The main problem with this new “health contribution” is that all Quebec residents will be required to contribute to the fund, whether or not they use any medical services.

Ontario attempted a similar political scheme in 2004 when the provincial government implemented the Ontario Health Premium (OHP). Comparable to Quebec’s new health contribution, the OHP is simply another tax. Instead of being linked to a person’s past or potential use of the health care system, the Ontario Health Premium is

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partially linked to a person’s income level and is capped within predetermined income groups. Thus, the primary difference between the two provincial health taxes is the way in which they are structured. While Quebec’s new health contribution is a regressive tax, the OHP is a progressive tax. Nevertheless, in both provinces, the health taxes are not linked to consumption.

As Brett J. Skinner predicted in a 2004 study, the OHP has not made health care spending more sustainable in the province of Ontario.

This is because consumers are not responsible for their demands for medical care because the premium is not linked to the cost of care or to a person’s past or potential use of medical services (Skinner, 2004).

Despite the introduction of the health tax, government health expenditures in Ontario are increasingly consuming a greater proportion of provincial revenues. According to our most recent research, Ontario is one of the worst provinces in terms of managing the growth in government health spending: health spending is projected to consume 50% of the province’s revenues by 2014 (Skinner and Rovere, 2009).

As with the Ontario Health Premium, Quebec’s new health tax will not solve the problem of unsustainable growth in government health spending because it is not tied to current or projected consumption.

To avoid future rationing of health care services, the health contribution will have to be increased or new taxes will have to be introduced to keep up with rising government health care costs.

Simply put, people should be required to take some responsibility for the cost of the health care

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Figure 1: Quebec—Average annual growth in government health expenditure (GHEX), total available revenue (TAREV), and gross domestic product (GDP), 1999/2000 to 2008/2009 8

6.9%

6 Percent

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5.1% 4.4%

4

2

0

GHEX

TAREV

GDP

Sources: Statistics Canada, 2009a, b.

services they consume. This is a more sustainable approach to financing provincial health care because it would create the necessary incentives for individuals to make optimal choices when using medical services, and would likely result in reduced demand for unnecessary care. Moreover, it would improve the allocation of medical resources as the supply of medical services would be determined by consumer demand. The province should, at minimum, move away from its dependence on taxes and reject any proposal that would introduce new health levies. Though a new tax might provide a one-time boost in provincial revenue, it is not a sustainable solution.

The health deductible While Quebec is taking one step backward by introducing the health contribution, it is moving in the

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right direction with its plans to introduce a health deductible. If the province goes ahead with this proposal, Quebecers will pay a user fee when they use medical services—for example, when they visit their family doctor or go an emergency room— until a determined deductible limit has been reached (e.g., 1% of a family’s income). One proposal has suggested that the fee be set at $25 per visit (Seguin, 2010, Mar. 30).

The problem with the current system is that because patients pay for their health care through taxes, there is no price at the point of service.

Without price signals, individuals do not have an incentive to control the amount (and type) of health care services they consume, which inevitably leads to excessive demand for health care services. On the other hand, if individuals were responsible for bearing part of their health care costs out of pocket, then they would be sensitive to costs and would reduce their

health care consumption accordingly (Newhouse et al., 1993).

The primary resistance to cost sharing for medically necessary services in Canada is the belief that low income individuals would be deterred from using health care services to the detriment of their health.

The underlying assumption is that the rich would have access to high quality health care while the poor would not, and the health of low income families would suffer as a result.

However, the results of the RAND Health Insurance Experiment—a seminal study on the effects of cost sharing for medical services on health care utilization and health outcomes—indicate that such criticisms are mostly unsubstantiated (see Rovere, 2009, for explanation).

The RAND study found that although cost sharing reduced all visits (for necessary and unnecessary care) to the emergency room, it did not generally increase unfavourable clinical outcomes (Newhouse et al., 1993).

Importantly, the study found that when cost sharing among the poor led to adverse health outcomes, those outcomes occurred only among low income individuals with low blood pressure and/or specific chronic health conditions (Newhouse et al., 1993). While the RAND study did not recommend system-wide cost sharing exemptions for all low income families, it did recommend exemptions for low income individuals with specific chronic conditions (Newhouse et al., 1993).

It should be noted that low income individuals are exempt from paying user fees in the majority of the European countries that have cost sharing mechanisms for health care services (Irvine and Gratzer, 2002).

Fortunately, the Quebec government recognizes that user fees would “have a positive impact on the behaviour of health-care providers and users,” while “directing them to the most appropriate resource in the circumstances” (Bachand, 2010: 19). The introduction of user fees may require an amendment to the Canada Health Act, but as Finance Minister Bachand has said, “Maybe it’s time Canadians sit down and examine that legislation” (Seguin, 2010, Mar. 30).

Conclusion Faced with the reality of unsustainable health care costs, the government of Quebec has indicated, through its recent budget, that it is willing to introduce meaningful reforms. However, it must be cautious with regard to which reforms it introduces. The new “health contribution” will not solve the problem of unsustainable health care spending.

But if the province goes ahead with its proposal to introduce a health deductible, appropriate incentives will be in place for both patients and providers to use the health care system more responsibly.

Quebec has the opportunity to become Canada’s health care maverick. Although the province has taken one step backward by introducing a new tax, it still has the chance to take a giant leap forward by implementing user fees.

References Bachand, Raymond (2010). 2010-2011 Budget Speech. Government of Quebec, Ministry of Finance.

www.fraserinstitute.org

Irvine, Carl, and David Gratzer (2002).

Medicare and User Fees: Unsafe at Any Price? AIMS Background Paper No. 9. Atlantic Institute for Market Studies.

Newhouse, J. P., and The Insurance Experiment Group (1993). Free for All? Lessons from the RAND Health Insurance Experiment. Harvard University Press.

Rovere, Mark (2009). Revisiting Cost Sharing in Canada. Fraser Forum (June): 6–9. <http://www.fraserinstitute.org/Commerce.Web/product_files/RevisitingCostSharinginCanada.pdf>.

Seguin, Rheal (2010, March 30). Quebec Stirs Health-Care Debate with Proposed User Fee. Globe and Mail. <http://www.theglobeandmail.com/ news/politics/quebec-stirs-healthcare-debate-with-proposed-userfee/article1517624/>.

Simpson, Jeffrey (2010, April 5). In Quebec, Health Care Is No Longer a Free Ride. Globe and Mail. <http://www. theglobeandmail.com/news/opin ions/in-quebec-health-care-is-nolonger-a-free-ride/article1524015/>.

Skinner, Brett J. (2004). Paying More, Getting Less: Ontario’s Health Premium and Sustainable Health Care.

Fraser Institute.

Skinner, Brett J., and Mark Rovere (2009). Paying More, Getting Less: Measuring the Sustainability of Government Health Spending in Canada (2009 Report). Fraser Institute.

Statistics Canada (2009a). Financial Management System (FMS) 2009.

Statistics Canada.

Statistics Canada (2009b). Table 3840002—Gross Domestic Product (GDP), Expenditure-Based, Provincial Economic Accounts, Annual.

Statistics Canada.

Fraser Forum June 2010

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Forum Focus

HEALTH CARE REFORM IN CANADA

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Drug delays in Canada The case for privatizing drug insurance Mark Rovere

T

his March, the Fraser Institute released Access Delayed, Access Denied, our fourth annual report on the wait for new medicines in Canada. The report measures the length of time that Canadians must wait before they can have access to the newest prescription medicines, and it draws attention to the impact that Canada’s public policies and institutions have on this delay. The conclusion of this year’s report was that Canadians who are dependent on provincial public drug programs would have better access to new prescription drugs if public plans were replaced with a competitive private sector drug insurance market.

For the first time, this year’s report compared the reimbursement delays and coverage of new drugs under private drug insurance plans with delays and coverage under public drug plans. Using this data, we were able to measure the difference in the amount of time (in days) taken by both public and private drug insurance schemes to

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grant reimbursement approval for new drugs.

Results from our analysis show that, in general, private drug insurers in Canada tend to cover far more new drugs and approve those drugs for coverage much sooner than public drug programs (Skinner and Rovere, 2010). These findings support the notion that Canadians who are dependent on provincial drug programs would be better off (having greater access to more new drugs sooner) if existing public drug plans were replaced with a competitive private sector market for drug insurance.1

Waiting for access In recent years, Health Canada has consistently reduced the amount of time it takes to grant market approval for new medicines. Although Health Canada should be recognized for this improvement, Canadians are still waiting too long for access to the

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newest prescription drugs compared to consumers in other countries.

Our study shows that in all three years observed (2006, 2007, 2008), Health Canada took longer (on average) than the European Medicines Agency, its European equivalent, to grant market approval for new drugs. Likewise, Health Canada’s performance was worse than that of the American Food and Drug Administration in four of the last five years studied (2004 to 2008) (Skinner and Rovere, 2010).

Figure 1 shows the consolidated average wait for access to new medicines, measured in days, for the years 2004 to 2008. The first segment of the bar represents the time taken

by Health Canada to certify that new drugs are safe and effective before allowing patients to use them.

This part of the wait for access to new medicines affects all patients in Canada equally, whether they pay for their drugs out of pocket, have private insurance, or rely on public drug programs.

Figure 1: Weighted average total delay (in days) for access to publicly insured new medicines in Canada, by wait segment, averaged across all provinces, 2004–2008

839

2004

648

696

2005

673

487

2006

608

453

2007

484 CR to NOC

388

2008 0

300

Denials of access under public plans

NOC to PR

316 600

900

1,200

1,500

Days Abbreviations: CR: the date the drug manufacturer’s application for marketing approval is recorded or filed in Health Canada’s Central Registry.

NOC: the date Health Canada issues an official Notice of Compliance, certifying that the new drug is safe and effective and is legally approved for sale in Canada.

PR: the date on which the first public reimbursement of the new drug is recorded in the formularies of each provincial drug program.

Sources: Health Canada, 2009a, Brogan Inc., 2009; calculations by Skinner and Rovere, 2010.

Table 1: Public reimbursement approvals (averaged across all provinces), as a percentage of new drug submissions (NDSs) that received a notice of compliance (NOC) from Health Canada, 2004–2008, as of December 31, 2009

Percentage of NOCs approved for public reimbursement Number of NDSs that received a NOC from Health Canada

The second segment of the bar represents the period of waiting for those who are dependent on public drug programs. As figure 1 shows, the time spent by the provinces to approve new drugs for public reimbursement decreased over the fiveyear period.2 The total average wait for publicly insured access to new medicines approved by Health Canada improved from 1,487 days (4.1 years) in 2004 to 704 days (1.9 years) in 2008.

2004

2005

2006

2007

2008

23.0%

16.2%

28.0%

19.1%

20.3%

47

45

51

44

32

Note: When a new drug is approved by Health Canada as safe and effective it is issued a notice of compliance (NOC).

Sources: Health Canada, 2009b; Brogan Inc., 2009; calculations by author.

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The provincial governments have improved their reimbursement delays since 2004, but this does not necessarily mean that patients have better access to new drugs. In too many cases, patients are denied access to new drugs by their public plans.

Our analysis shows that most of the drugs that are approved by Health Canada as safe and effective are not declared eligible for reimbursement under provincial drug plans. As of December 31, 2009, averaged across all provincial public drug programs, only 23.0% of new drugs that Health Canada approved as safe and effective in 2004 had actually been approved for reimbursement (fully or partially) by the provinces, compared to 16.2% of new drugs certified in 2005, 28.0% of new drugs certified in 2006, 19.1% of new drugs certified in 2007, and 20.3% of new drugs certified in 2008 (table 1). As a result, Canadians who are dependent on public drug plans are often denied access to the newest drugs.

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Forum Focus

In contrast, our research shows that private drug insurers in Canada tend to cover significantly more new drugs, and they generally extend coverage to new drugs far more rapidly than do the public drug plans. Having access to an assortment of new drugs is optimal because it increases treatment options for patients. For instance, while a particular medicine may work for some, it may not work for others.

Private drug insurance coverage Tables 2 and 3 show all of the new drug submissions (NDSs) that received market approval from Health Canada in 2004.3 Pharmaceutical and biological drugs are separated by drug type and are listed in alphabetic order.

The tables show the delay (in days) for each new drug between the time Health Canada issued a Notice of Compliance, certifying that the drug is safe for use, and the drug’s first listing (i.e., reimbursement approval) on any provincial public drug plan. The tables also show the delay (in days) between Health Canada’s approval and the drug’s first paid claim registered with any private drug insurer. The data is aggregated across all provincial public drug plans and private drug insurers, and is current to December 31, 2009.

As tables 2 and 3 show, there is a significant difference in the time that it takes to approve a new drug for public reimbursement and the time that it takes before a new drug is claimed for reimbursement through a private insurance plan. Likewise, there is a significant

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HEALTH CARE REFORM IN CANADA

Table 2: Pharmaceutical drugs—first listing on a public drug insurance plan (aggregated across all provincial drug plans) and first claim with a private drug insurance plan (aggregated across insurance companies and provinces), for all new pharmaceutical drugs that received a Notice of Compliance from Health Canada in 2004, as of December 31, 2009 NDSs that were issued a Delay (in days) between Delay (in days) between Difference (in days) NOC by Health Canada NOC and 1st Listing on NOC and 1st Claim on Private Drug Plans Public Drug Plans in 2004 ADDERALL XR

866

24

842

ACTIVELLE

Not listed

345

N/A

AVANDARYL

Not listed

586

N/A

BONVIVA

Not listed

1,000

N/A

CIPRALEX

1,411

61

1,350

CIPRO XL

147

20

127

CIPRODEX

1,331

59

1,272

CLIMARA PRO

1,761

1,545

216

CLOBEX

Not listed

146

N/A

EBIXA

301

16

285

FACTIVE

Not listed

385

N/A

FASLODEX

Not listed

134

N/A

FROVA

Not listed

1,244

N/A

LEVITRA

Not listed

16

N/A

MULTIHANCE

672

904

-232

NUVARING

873

247

626

OXYTROL

224

121

103

PENLAC

Not listed

104

N/A

PREFESTA

Not listed

92

N/A

PREVACID

Not listed

132

N/A

PREVACID FASTAB

1,177

34

1,143

RELPAX

300

99

201

SENSIPAR

667

80

587

SONOVUE

Not listed

541

N/A

STRATTERA

285

61

224

TELZIR

173

69

104

TEVETEN PLUS

246

63

183

TIAZAC XC

142

145

-3

VFEND

285

-44

329

VIGAMOX

143

63

80

YASMIN 21

173

28

145

ZAVESCA

Not listed

517

N/A

ZYMAR

214

-144

358

Note: A negative delay indicates that a patient had access to a drug before Health Canada’s approval though the Special Access Programme (SAP). The SAP authorizes access to a drug that has not been approved by Health Canada for patients with a serious life-threatening condition.

Sources: Health Canada, 2009b; Brogan Inc., 2009.

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Table 3: Biological drugs—first listing on a public drug insurance plan (aggregated across all provincial drug plans) and first claim with a private drug insurance plan (aggregated across insurance companies and provinces), for all new pharmaceutical drugs that received a Notice of Compliance from Health Canada in 2004, as of December 31, 2009 NDSs that were issued a Delay (in days) between Delay (in days) between Difference (in days) NOC by Health Canada NOC and 1st Listing on NOC and 1st Claim on Private Drug Plans Public Drug Plans in 2004 ALDURAZYME

Not listed

65

N/A

AMEVIVE

Not listed

245

N/A

FABRAZYME

Not listed

434

N/A

FORTEO

1946

69

1,877

HUMIRA

192

23

169

INFANRIX-HEXA

Not listed

1,608

N/A

MYOBLOC

Not listed

Not claimed

N/A

NEULASTA

568

48

520

OVIDREL

Not listed

61

N/A

PEGASYS RBV

189

32

157

REPLAGAL

Not listed

397

N/A

XOLAIR

Not listed

92

N/A

Sources: Health Canada, 2009b; Brogan Inc., 2009.

difference in the number of drugs that have been approved for public reimbursement and the number of drugs that are eligible for private coverage.

The solution: private insurance Our research shows that, on average, Canadians who are dependent on public drug plans wait too long for access to the newest prescription drugs and, in most cases, they are denied access completely. The best way to improve access to the newest prescription medicines for those covered by public drug programs is to replace existing public drug plans with a competitive private insurance market. Under this model, low income individuals (as determined through means-testing)

through means-tested subsidies for those with low incomes.

2 It is important to note that provinces often take more than a year to decide whether or not to make a new drug eligible for public reimbursement.

Therefore, more new drugs that were approved by Health Canada in the observed years could eventually be granted eligibility for public reimbursement in the future, consequently increasing average wait times. This delay will be captured in future reports.

3 Only those drugs that received a Notice of Compliance from Health Canada in 2004 are used for comparison as they provide the most comprehensive dataset.

References Brogan Inc. (2009). Special data request.

would receive public subsidies which would be used to purchase a private drug plan that best suits their medical needs.

As a result, Canadians would have universal access to prescription drug coverage, but consumer choice would not be restricted by governmental control of supply.

Under such a system, private drug insurers would have to compete on prices and services, to the benefit of both consumers and taxpayers.

Replacing ineffective government drug plans with competitive drug insurance is the best policy choice for improving Canadians’ access to the newest prescription drugs.

Notes 1 Under this model, universal access to drug insurance would be facilitated

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Health Canada (2009a). 2007 Annual Drug Submission Performance Report: Part I Therapeutic Products Directorate (TPD); Part II Biologics and Genetic Therapies Directorate (BGTD). Health Canada, Health Products and Food Branch. <http://www.hc-sc.gc.ca/dhpmps/ prodpharma/applicdemande/docs/ perform-rendement/ar-ra/indexeng.php>.

Health Canada (2009b). Special Data Request. Detailed drug product data matching the Brogan Inc. (2008) dataset, which was used to measure provincial reimbursement delays and rates.

Skinner, Brett J., and Mark Rovere (2010). Access Delayed, Access Denied: Waiting for New Medicines in Canada (2010 Report). Fraser Institute. <http://www.fraserinstitute. org/commerce.web/product_files/ accessdelayedaccessdenied2010_ CDN.pdf>.

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Quarterly Research Alert Tax policy Yuriy Gorodnichenko, Jorge Martinez-Vasquez, and Klara Sabirianova Peter (2009). Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia. Journal of Political Economy 117, 3: 504–54.

The study examines the effects of Russia’s 2001 flat tax reform on tax evasion and productivity using consumption and income data from household surveys between 1998 and 2004. The authors use the difference between reported consumption and reported income (i.e., the consumption-income gap) to detect changes in tax evasion after the tax reform. They find that reported income increased by 10% to 11% relative to consumption after the tax reform, and that the consumption-income gap decreased by about 9% to 12% more for households that experienced a reduction in their marginal tax rate (the tax rate applied to each additional dollar earned). The authors also find that the productivity effect of the tax reform is positive. Overall, the adoption of a flat tax rate in Russia led to significant reductions in tax evasion and increased tax revenues.

—Milagros Palacios

Russia’s flat tax

Simeon Djankov, Tim Ganser, Caralee McLeish, Rita Ramalho, and Andrei Shleifer (2008). The Effect of Corporate Taxes on Investment and Entrepreneurship. NBER Working Paper No. 13756. National Bureau of Economic Research.

The authors investigate the effects of corporate taxes on investment and entrepreneurship in 85 countries using 2004 survey data. The survey allows them to compute all relevant taxes applied to a standardized domestic

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enterprise during its first year of operation. They find that increasing the effective corporate tax rate reduces investment and entrepreneurial activity. Specifically, a 10 percentage point increase in the effective corporate tax rate during the first year of operation reduces a country’s total investment to GDP ratio by about 2 percentage points, reduces the number of businesses (“business density”) by 1.9 firms per 100 people, and discourages the rate of new business registration by 1.4 percentage points. The authors also find that increased corporate taxes are associated with a larger informal economy (i.e., economic activity that is not included in official economic statistics because it is neither taxed nor monitored by the government). Each 10 percentage point increase in the effective tax rate increases the informal economy’s share of total economic activity by nearly 2 percentage points.

—Milagros Palacios

Political economy Niclas Berggren, Henrik Jordahl, and Panu Poutvaara (2010). The Looks of a Winner: Beauty and Electoral Success. Journal of Public Economics 94, 1–2: 8–15.

This study explores whether beauty is an advantage in Finnish politics. Through web-based surveys, the authors analyze visual assessments from 10,011 respondents of 1,929 prominent Finnish political candidates in electoral campaigns at the parliamentary and municipal level. Finland’s proportional electoral system allows the authors to compare the electoral success of non-incumbent candidates from the same party. The authors find that beauty does in fact increase electoral success. Specifically, an increase in the authors’ measure of beauty by one standard deviation is associated with an increase of between 17% and 20% in the number of votes for the average nonincumbent candidate. The positive relationship between beauty and electoral success holds for both male and female candidates in Finland and is unaffected by a candidate’s education and occupational background. The authors also find that beauty is more strongly correlated with success than is perceived competence or trustworthiness.

—Charles Lammam

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New studies, new ideas

David Card, Kevin Hallock, and Enrico Moretti (2010).

The Geography of Giving: The Effect of Corporate Headquarters on Local Charities. Journal of Public Economics 94, 3–4: 222–34.

This paper examines the impact of the presence of corporate headquarters on the incomes of local charities. It uses data on the head office locations of publicly traded companies in the United States from 1989 to 2002 and contributions received by local charities in 147 large cities. The paper has three major findings. First, the presence of corporate headquarters has a significant effect on local charities. Each additional corporate headquarters produces between $3 and $10 million in additional contributions to local charities per year, while each $1,000 increase in the combined market value of the companies headquartered in a city produces between $0.6 and $1.6 in contributions to local charities. Second, the corporate headquarters effect is driven mostly by donations from highly compensated individuals associated with the corporate headquarters and not by direct donations from the corporations. Finally, the increased private sector donations due to the presence of corporate headquarters does not “crowd out” (i.e., displace) government contributions to local charities.

—Charles Lammam

Immigration Giovanni Peri (2009). The Effect of Immigration on Productivity: Evidence from US States. NBER Working Paper No. 15507. National Bureau of Economic Research.

The author analyzes US data in each census year from 1960 to 2000 and in 2006 for the 50 states and Washington, DC, to determine the impacts of immigration on a host of state-level economic variables. He finds that immigrants to the United States do not displace the employment and hours worked of natives, but that they reduce physical capital accumulation and the adoption of production technologies that are biased in favour of highly skilled

individuals. He also finds strong evidence of immigrants increasing “total factor productivity” (i.e., the efficiency of the production process). The author speculates that productivity gains occur, in part, because increased immigration promotes efficient task specialization among immigrants and natives. Overall, he estimates that a 1% increase in employment in a US state due to incoming immigrants produces a 0.5% increase in the state’s income per worker.

—Charles Lammam

Big Stock Photo

Charitable giving

Poverty Joseph J. Sabia and Richard V. Burkhauserf (2010). Minimum Wages and Poverty: Will a $9.50 Federal Minimum Wage Really Help the Working Poor? Southern Economic Journal 76, 3: 592–623.

Between 2003 and 2007, 28 US states increased their minimum wage to a level above the federal minimum wage, which also increased during that period. This paper investigates the widely held perception that these minimum wage increases helped the working poor. The authors define the “working poor” as those with incomes below the poverty thresholds published by the US Census Bureau. Using data from the Current Population Survey, the authors find that state and federal minimum wage increases did not reduce state poverty rates. They also estimate that a proposed federal minimum wage increase from $7.25 to $9.50 per hour will not decrease poverty since the majority of workers affected by the minimum wage increase are not poor, since many poor workers earn more than the proposed minimum wage, and since the

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Fraser Forum June 2010

27

Christian Broda, Ephraim Leibtag, and David E. Weinstein (2009). The Role of Prices in Measuring the Poor’s Living Standards. Journal of Economic Perspectives 23, 2: 77–97.

Fotolia

The authors examine the related claims that poverty rates in the United States have remained the same since the late 1960s and that the poor pay more for goods and services than those in higher income groups. Unlike previous studies, the authors use data on the purchases of specific items for 40,000 households in the US, rather than data on the prices paid for broad food categories. They find that the poor actually pay less for identical goods because they shop at cheaper stores and because they find bargains within stores. The authors also find that the Consumer Price Index (CPI), a measure typically used to gauge cost of living increases, has overestimated poverty rates in the US because it does not fully account for substitutions away from more expensive to cheaper goods, new goods, and quality improvements in existing goods. The authors find that, once the CPI is adjusted for those effects, the poverty rate has decreased substantially since the 1960s and is half of the 2005 official poverty rate.

—Amela Karabegović

Labour market policy Alan B. Krueger and Andreas Mueller (2010). Job Search and Unemployment Insurance: New Evidence from Time Use Data. Journal of Public Economics 94, 3–4: 298–307.

Using 2003 to 2007 survey data for the 50 US states and Washington, DC, the authors examine the effort unemployed workers put into finding new jobs and the factors that affected their effort. They measure effort as the amount of time allocated to job search activities. The

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authors find that job search effort is inversely related to the generosity of the unemployment insurance. That is, unemployed workers in states with more generous unemployment insurance programs made less effort in their job search than those in states with less generous unemployment insurance. The authors also find that the job search effort of workers receiving unemployment insurance increases as the end of the benefits period approaches. Unemployed workers who did not receive unemployment insurance made a constant job search effort over their period of unemployment.

—Alex Gainer and Niels Veldhuis

Fotolia/iStockphoto

proposed minimum wage will likely reduce employment opportunities for the working poor.

—Amela Karabegović

Fiscal policy Claudia R. Sahm, Matthew D. Shapiro, and Joel B. Slemrod (2009). Household Response to the 2008 Tax Rebate: Survey Evidence and Aggregate Implications. NBER Working Paper No. 15421. National Bureau of Economic Research.

This study investigates the impact of the spring 2008 tax rebate in the United States on household spending. The tax rebate was a one-time $96 billion payment intended to stimulate household consumption; eligible households received between $300 and $2,000. Analyzing household survey responses, the authors find that roughly one-fifth of households indicated that the tax rebate led them to “mostly increase” spending, while over half of the respondents indicated that the rebate would be mostly used to pay off debt. The authors note that the survey results are consistent with overall US data on spending, saving, and debt in 2008. Since only a fraction of the tax rebate was spent, the findings suggest that the 2008 tax rebate had only a modest impact on overall household spending.

—Alex Gainer and Niels Veldhuis

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