Why is Canada doing better than America?

Today I found a great article on the BBC talking about how Canada has a much lower unemployment rate than most European countries and now has a shortage of labor for the booming oil sands in Alberta.

This made me wonder why Canada is doing so much better than the US and Europe and what the underlying differences are between the three major economics (Europe is for obvious reasons more fragmented but their economy is in recession as a whole and that is where people are coming from).

Looking at the underlying features between the US and Canada they are very similar. They have extremely similar labor laws, extremely similar proportions on who works in what industries, and almost every other major figure is similar except for three important features:

1. Canadians are paid more at the lower wage levels.
2. Capital Gains are taxed at a progressive rate in Canada, but not in the United States.
3. It takes only a day to start a business in Canada and they are ranked by the World Bank as the best country in the world, meaning competition in the private sector.

These three features are why Canada is doing so well right now and are finding such a developed economy.

The first point, higher wage levels, means that there is a higher demand for goods and services in Canada at the local level nationwide than in the US or Europe. The US is having a lagging economy right now, almost certainly due to lower consumer demand. Wal-Mart and other retailers are not finding people to purchase their services which is contributing to poor economic performance. Companies cannot stay open if no one will buy their product. Canada doesn't have this problem because everyone working full-time can survive. This helps small businesses and the entire economy.

Taxing capital gains as regular income solves the problem of the government not losing a lot of money during a recession, which keeps deficit low. However, I can't observe a difference in the stock markets so it doesn't dissuade people from removing their money from the market.

The United States has a similar sector makeup, and the oil boom is isolated to Northern Alberta, and the United States is also having an increase in drilling in different regions. But Canada's entire economy is doing better than the US and Europe, so blaming the oil boom is not enough, since it accounts for less than 19% of the economy.

So, the response of the stock markets is the same, the sector makeup is the same, all but one major feature of these economies I find are comparable, and that feature is distribution of wealth.

After the recession in 2008 the rest of the world came back (except Europe, but only after the implementation of austerity) and there was high demand for goods and services. The average Canadian is paid more than the average American, their distribution of wealth is a lot more equitable, close to what Americans want actually. Because of this difference, the change in economic spending wasn't so large in these other countries. a lot of America's economic growth of the past 40 years was also based in a lot of lending, through a system of government incentives for people borrowing for houses, and schools, which is more than other countries that have seen more steady growth. When the economy collapsed, millions of workers were laid off, and demand struggled. Without massive incentives to change this fact and increase the quality of life we will continue to see a major shift in economic growth. Nick Hanauer (an entrepeneur) made a TED talk talking about how the economy is an ecosystem (I'm paraphrasing) and that it requires transactions to be made, and when one large group of people are unable to make the transactions the entire ecosystem/economy falls apart. Other developed countries don't have this problem like us, and it is the only major characteristic that separates the US and Canada.

If we want to see growth and faster recoveries from recessions we need to increase our economy from the bottom so more people can participate, because no entrepreneur can start a business in a market where there is no demand. This is the reason the American economy is stagnating. It is also similar to the reason why the European economy is in depression, because millions of people have had their income taken from them and the aggregate demand curve has collapsed, leaving firms new and old with no demand, decreasing employment, and decreasing GDP, creating a cycle that has been feeding on itself. Western Europe (which has had large economic ties for the past 40 years) is now divided between north and south (though it hasn't always been to the same extent) between the employed and the unemployed, and this has reduced demand for goods and until they find that people in Southern Europe have opportunities restored, I have little doubt Europe will remain in recession. Other major economies are still growing at increased rates (as long as they didn't implement austerity).

I also predict that Canada saw a reduction in their GDP growth in 2012 because they are so heavily tied to the American economy which hasn't been growing as fast as we need to.

We need more avenues to the middle class so everyone with the skill and will can be as well off as possible. It will be a huge boom to our country's economy.

Sources:
https://en.wikipedia.org/wiki/Economy_of_the_United_States
https://en.wikipedia.org/wiki/Economy_of_Canada
https://en.wikipedia.org/wiki/Taxation_in_Canada
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG economic growth by country where available
https://www.youtube.com/watch?v=f0ehzfQ4hAQ Summary of distribution of wealth
https://www.youtube.com/watch?v=CKCvf8E7V1g TED Talk

The next 2 years,

Independence Day is a good day to look backwards at our accomplishments (emancipation, universal suffrage, civil rights, etc.) and look at what our country must do in the future. So that is my theme for today.

The United States currently has a large number of daunting problems/challenges, and a number of great opportunities:

1. Partisan gridlock and yellow journalism (the largest of whom are MSNBC and FOX) is tearing our nation apart. With such polarization it puts a lot of pressure on our leaders to lead extremely well to make it impossible for these pundits make them look bad or good depending on their point of view. Obamacare is a perfect example of how such biased reporting can skew people's opinions, as Kaiser points out where the majority of Americans don't know what Obamacare actually does. That the majority of Americans don't know what a major law does shows a clear failure in our country's media. Obama clearly needs to work on his PR.
2. Our two parties are at once closer than they should be and more distant than they have been in a long time. Everything the Democrats propose, even if it is taken practically word for word from a previous Republican proposal (like Obamacare and the Republican counterproposal in 1993) will be blocked from the Republicans. Most Americans when they turn on cable news get very biased and incomplete information about what is actually being proposed on the hill, and this furthers the partisan split as the Fox News watchers go one direction and the NBC folks go another. Very few people find the balanced center where you get the facts without the spin. This helps move our parties further and further apart in social issues with very little center in the middle, but on some issues like our constitutional freedoms (like the right to an attorney) neither the left nor right wing media is willing to tell the full truth and the parties further split on some core issues (like health care, whether there actually were weapons in Iraq, distribution of wealth and income, access to education, among others) and the coverage on some issues the media is so completely monotonous and frequently incorrect that there is little knowledge or debate about some pressing issues (like what should be done in Europe with the economy, Israel, North Korea, China, mass transit, among other issues). This force drives our two parties further to one side as they continue to get money from a select group of people that drive our policy. American policy is so much more diverse and there is so much more information about these issues than the media tells us, which eventually will be so clearly incorrect that a lot of Americans are going to be very disillusioned as the media grows further from reality.
3. We will need more parties and a new election system to represent the splitting of Democrats ("Old Democrats" and "New Democrats") and Republicans (Libertarians and Christian fundamentalists) which have such large differences between them that will make the parties unstable. If we don't I fear we will eventually have a situation like Canada in 2011 which will be devastating to the victors once the parties split. Changing our voting system will also help bridge the partisan divide because everyone can agree with the Libertarians on something, creating a bridge in congress between the two sides. It will allow more views to be represented in Congress that will be a more accurate picture of Americans' beliefs.
4. Our health care costs will continue to rise (though not as quickly as they have been) with Obamacare in place because it doesn't go far enough and it will need to be expanded upon and reevaluated.
5. Many students coming out of our education system today will be so unprepared to be in the world compared to their international peers because of the way the government finances and runs education which means it will need to be reevaluated. If we don't we will be beaten economically and our economy will suffer from the lack of knowledge our students will have.
6. We will need to reform our tax code so tax capital gains as regular income (like Australia) which will balance the budget and encourage investors to invest for the long-term so companies can use the money they give them, and give tax breaks to struggling American families to raise the demand curve. We will need to increase the incentives of businesses to hire people through taxes. If we don't our economy will remain unstable. This will also balance the budget. If we changed it we could become a very stable economy and surpass all other nations in economic growth.
7. Immigration reform will finish going through which will probably be more work visas for farm workers.

Happy Independence Day, let's make this country greater!

Progressive Capital Gains Taxes Make Sense

I have developed a tax code which I published previously: http://stidmatt-views.blogspot.com/2012/10/a-new-tax-code.html

I already know the least popular part of this plan will be taxing capital gains as regular income is going to be the claim that I am hurting investors. There is some merit to this, but it only looks at the individualistic side of the picture. People will claim I need to tax capital gains at a lower rate than regular income, that capital gains keep the economy running, that taxing capital gains as regular income introduces double taxation,  but there are some problems with this. Most arguments come from this far-right think tank’s article on why they claim to oppose a progressive capital gains tax: http://reason.com/archives/2013/01/06/why-double-taxation-must-cease

1. The biggest problem with this article is that the way we currently tax capital gains (which I would never change) does not introduce double taxation. The Capital Gains tax is only on the amount the investment made, which means that despite what many will claim, all income is only getting taxed once.
2. Another thing, is that you are only taxed once you pull the money out, if you leave the money in a stock for over a year you will only pay taxes the year you pull your money out. http://www.irs.gov/uac/Ten-Important-Facts-About-Capital-Gains-and-Losses
3. Taxing capital gains as regular income will give the government enough revenue to fix the debt without touching spending. 10% of our government spending in Fiscal Year 2012 went to the debt, and that money should be going to the American people in the form of health care and education, or a lower tax burden.

These types of groups write sensationalist loaded language that is designed to make people who already agree with them to be outraged (and frankly, I have occasionally been the victim of some left-wing groups doing the same tactic) and should be ashamed of themselves.

Taxing capital gains as a progressive tax is just fair and actually makes good economic sense.

• If someone invests their money early and keeps it in for decades they could have billions of dollars if they select right, like pretty much everyone on the Forbes 400 list. A progressive capital gains tax will encourage people to keep money in for the long term and withdraw gradually.
• If Capital Gains are taxed at a fixed rate and you have a billion dollars in the stock market and the market collapses and you pull everything out along with your billionaire peers the market will collapse further and companies will have less capital to invest with, which will put them at odds between the continued growth of the company through assets and employees, or giving their investors their annual/quarterly dividend and increase to their stock, and we all know which usually takes priority.
• To stabilize the stock market we need to give an incentive for these mega-investors to keep their money in for the long term so that companies can use their money efficiently, downturns can be short, and unemployment can be lower than otherwise which will preserve our economy’s demand curve. By preventing large market collapses it will help people who have their money in the market from losing all of their gains, and companies will continue to have capital to invest and grow, and hire more people which will raise the demand curve, decrease unemployment, and make a stronger economy.

This is why a progressive income tax that treats capital gains as regular income is just healthy economics for America and the world.

Another closely related issue with the corporate world is how much people should be paid. www.ethisphere.org is a collection of stocks that beats the S&P 500 every single year in growth, and are selected not for their stock returns (which are considerable) but for their morality. By paying their workers more every year than their counterparts they have lower turnover, lower training costs, lower hiring costs, and their employees make fewer errors which cost any company money, giving these companies money to either grow, and/or pay their investors more money than their minimum-wage and/or Chinese slave driving competitors. (http://www.aljazeera.com/programmes/slaverya21stcenturyevil/2011/10/2011101091153782814.html) By paying people more money this helps the corporation immediately by getting and keeping the best workers in the market and making them valued which makes a difference. In the long term at the societal level it raises the demand curve for goods and services which means that more people can afford the goods the corporation makes which increases their demand and means that a stable relationship between company owners, employee, investor, and consumer can develop. This is just good economics from every perspective for the reasons I outline above. As Henry Ford said, “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.”
Read more Ford quotes at http://www.brainyquote.com/quotes/authors/h/henry_ford.html#UsAPu4ARukU4mAvm.

I also hope I don't have to defend taxing gambling winnings at a progressive rate.

To finish I want to make clear that even if we tax capital gains when they are sold at progressive rates, the best investors will still have more money. Using the tax code I designed I link to at the top, the amount kept for the following withdrawals per year are as follows, assuming cost of living is $20,000. These numbers are gross income from all sources, as I made my plan above to do.

• Someone making $20,000 or less in Capital gains where that is their entire income will pay nothing.
• Someone making $100,000 per year will keep $92,500 after taxes, 4.6 times the cost of living, and pay only 7.5% of their income.
• Someone making $500,000 per year will keep $402,500 after taxes, 20 times the cost of living, paying 19.5% of their income.
• Someone making $1,000,000 per year will keep $722,500 after taxes, 36.1 times the cost of living, paying 27.8% of their income.

Some people would say paying 27.8% is a horrible tax, but when you are keeping 36.1 times the cost of living after your taxes, you are doing well enough in my opinion.

Looking at countries in the world here: http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP we see a trend that most developed nations (by every measure) have the highest tax burdens, with exceptions of Taiwan, Singapore, and Hong Kong. What is the difference between these three countries and the countries next to them? I have identified a few:

1. Ease of doing business ratings are at the top of the list. The governments make it easy and people can easily trade while there are high barriers to entry and doing business in the less developed nations with similar tax burdens and much worse Human Development Index ratings. They are heavily involved in health care and education. They also tend to be small.
2. Chile is also developed as measured by HDI and have a low tax burden, along with large markets for exports.
3. They have low barriers to trade with other countries, which allow goods to be exported and goods to be imported at low cost.
4. All countries that are highly developed, except the United States, have universal health care which has no change in tax burden.
5. The connection between tax burden and quality of living is a correlation with a heavy concentration with developed countries (with a few exceptions) at the highest percentage, and a heavy concentration of undeveloped countries (with a few exceptions) at the lowest percentages.
6. The countries with a low tax burden and high growth tend to be trade and banking centers where goods pass through while the countries at the top of the list are highly developed and aren't transit points for international commerce like Taiwan, Singapore, and Hong Kong in their special situation.
7. Countries at the top of the Ease of Doing Business Index http://en.wikipedia.org/wiki/Ease_of_doing_business_index have low unemployment, their GDP growth beats their Population growth, with an exception of Japan which is hard to explain and I think it is something besides a large elderly population which is for another post when I will look at what it could be which at this point I am not certain, while the countries at the bottom of the list tend to be third world, with an exception of Venezuela leading me to detect other factors.
8. Of the top twenty countries in tax burden, only two that look to me like a truly third world country are Zimbabwe and Kiribati, and of the bottom twenty countries are mostly Sharia law countries with high oil exports, followed by third world countries to make the rest of the bottom 40. The top 40 countries by tax burden consists of many of the world's most highly developed or quickly developing nations. The trend is more or less clear with few exceptions to these rules.
9. Most countries at the top of the list have GDP growth that beats population growth and high levels of income equality, meaning high consumer demand and growing wages.

The statistics show me a correlation that is pretty strong with taxation around 40%, a strong health care system, a strong education system, an easy free market for new businesses (which I see as a key part of economic development), and low health care costs. The statistics show me another clear correlation between depressed economies, low taxation, poor health care, poor education systems, low GDP growth, and I feel the most important difference is high barriers of entry for new businesses. The popular correlation between high taxes and poor economic growth does not match the statistics.

To sum everything up, a progressive capital gains tax will help businesses and consumers, it will free up capital for businesses to use to grow, it will reduce the government debt which in the future will free up tax dollars to improve our schools and access to health care or send surpluses back to tax payers, and most importantly will encourage investors to keep their money in companies for a long time so that they can grow better creating more jobs, which will decrease the severity of economic downturns, and provide an incentive to increase wages for workers to reduce turnover and decrease training costs for businesses. This is why I think we should tax capital gains as regular income.