Saturday, August 25, 2012

Explaining Equalization

Aside from the occasional careless rants, unbeknownst to most Canadians is the federal Equalization program which has been described as either a wealth-sharing scheme, the glue that holds the federation together, or a fraudulent scam. This program is worth $15 billion in 2012 alone, which, for perspective, is the total income for 450,000 average Canadians. And yet, nobody really understands what it is really for. People have tried to explain it using the legalese of the Canadian Constitution or using even more confusing economic theories. Well, to make it simple, I argue that the main purpose of Equalization is to make sure that Canadians are treated the same wherever they reside in this country.

Government redistributes wealth. It's accepted that the wealthy must pay more into the system than they receive in return. The poor, with greater need, should be provided with greater benefit. This redistribution has become one of the principle pillars of our society. Equalization is just another mechanism to aid in this redistribution.

Imagine there is only one government in Canada. Here, there are three rich people and three poorer people living in separate areas of the country. Each rich person shares a portion of their wealth with the poorer person. The burden for the rich is the same, regardless of where they reside and so is the benefit for the poor.

After the redistribution, each wealthy person is equally worse off and each poorer person is equally better off. Well, what happens when you erect borders between these areas? In the following example, there would be two rich people in oil-rich Alberta. Both are transferring to one poorer person. While in the other part of the country, there is two poorer people for the one rich person.

In effect, either the rich in Alberta each have to pay a bit less to help the poor or the poor is tremendously better off compared to his situation in a one government country. Conversely, the rich in Quebec has to pay a lot more compared to the previous example or the poor, having to share the wealth of only one rich person, is worse off. 

Either way, this demonstrates that people are treated differently depending on where they live despite living in one country. This is because provincial borders put barriers around redistribution of wealth – a principle we accepted earlier. 

Equalization addresses this by moving wealth from the rich in one part of the country to the poor in another part of the country. The fact that there are more rich people living in one part of the country and more poor people in another means that, if you are looking at this from a provincial perspective, there would be more money transferred to some provinces than others. The program exists as an extension of the federal tax and transfer system to ensure that people are treated fairly wherever they reside. A poorer person, whether they live in Quebec, Alberta, Ontario or another other part of the country would be treated the same by government.

So, in this spirit, we should stop viewing recipients of Equalization as have and have-nots, or see the situation as subsidizing Quebec or the East, but rather view Equalization for what it really is - a program that ensures that the wealthy equally pays into the system and that the poor receives equally the support that they need, regardless of where people reside. This is not a program that subsidizes Quebecers or Ontarians or Maritimers, but rather a program that helps Canadians.

Note: Before people jump on it, I'd like to admit that this is a rather simplistic explanation. There are other equity, efficiency and effectiveness arguments for and against the program that I abstracted from in writing this post because, quite simply, I didn't want to blow your mind.


James MacDonald said...

Cool. I get it now. But what is the $15 billion? That's the amount that got redistributed or the cost of running the program? Also (hoping that this is not the cost) how is this monitored and conducted? Perhaps a follow-up article with equally awesome visuals.

Luan Ngo said...

Yeah the $15 billion is the amount that's redistributed. The cost for the administration of it is far less despite being really complex. Complex because the allocation is calculated using formulas won't even fit onto the same page if you tried to write it out. The explanation for this, as you wisely advised, will be saved for another post.

Tanya said...

Looking forward to lesson #2! I think you should also make youtube videos

BlueSectorIIX said...

So I understand EQ payments now, but why does a poor Frenchie who doesn't contribute to the economy or to his own personal wealth deserve money from a rich Albertan who actually does contribute? It seems to me that, as all the politicians who've ever meddled with the Constitution are from Quebec and Ontario, that these transfer payments were engineered in order to enrich the provinces from which said political engineers hailed.