Implications of limited investor attention to customer–supplier information transfers

Hui Zhu
2014 Quarterly Review of Economics and Finance  
We examine the (dis)incentive effects created by the respective tax systems to invest in human capital in Atlantic Canada and compare this to a select group of provinces from the rest of Canada. While findings show a steady decline in effective tax rates through the years, thereby creating an incentive effect to invest in post-secondary education, disproportionately higher rate gap differentials in the Atlantic Provinces, on average, combined with negative comparative statics reveal a somewhat
more » ... ifferent undertone. The counterproductive nature of the competing policies effectively nullifies any status quo argument for education or tax policy in the Atlantic Provinces, when compared to their brethren. The graduate retention rebate provides some solace to the narrative in helping to alleviate early tax burdens and equalize returns, but is difficult to claim effectiveness in assuaging any monetary windfall associated with migration. Introduction The goal of this paper is to assess the (dis)incentive effects created by the provincial tax systems for human capital investment in Atlantic Canada. Our test subjects are university graduates, but we note that such methodology could be applied to any level or subset of the population that possess human capital deemed scarce and productive, in the economic sense. We do not purport to suggest that university graduates are more important in the economic well being of an economy than, say, skilled trades or college graduates, e.g., and encourage one to think of our case as a subset of a larger sample of possibilities. Our presumption, like our goal, is simple; namely, an empirical investigation of incentivizing the tax system in Atlantic Canada remains an unexplored possibility for strategic policy implementation to retain and recruit scarce resources in the market for human capital. We use the impact on effective tax rates (ETRs) and rates of return as our policy litmus test and explore by empirical and simulation analysis the unilateral exploitation of a select number of provincial tax systems. Some may claim that this work puts the * Collins would like to acknowledge the support of the CRS-SSHRC institutional research grant at St. Francis Xavier University in helping to complete this research. proverbial cart before the horse, as it were, since to attract workers a province needs the requisite infrastructure and such may not be currently present at the appropriate level(s) to warrant an increase in the supply of skilled labour. To that end, we suggest that a more accurate assessment (or, at least, a plausible alternative) might be akin to a "chicken or the egg" argument; namely, which comes first? We leave this debate up to the interested reader for now, and focus on establishing the empirics of the analysis in an effort to add the requisite fodder for a more informed discussion. While previous research has examined the disincentive effects created by the tax system for, e.g., university and college graduates (see, for instance, Burbidge et al., 2012), the current study is differentiated in a number of key ways. First, the level of detail contained within Kevin Milligan's 2012 Canadian Tax and Credit Simulator (CTaCS) allows us to model investment decisions for the provinces in question for an extended period of time , which other studies have simply not done. The focus on creating a comparative advantage for human capital investment in Atlantic Canada also distinguishes this work from its predecessors, since much of the previous research is confined to Ontario as the provincial counterfactual (e.g. Collins and Davies, 2004, 2005a/b). Research that has considered provincial implications for human capital taxation, such as Collins (2008) and Burbidge et al. (2012), have done so by means of an aggregated snapshot of one or two years. The use of the CTaCS database ensures that all of the idiosyncratic deductions are accounted for in determining the full treatment that the tax system implies for the respective provinces. For instance, we account for items such as the graduate tax credit and graduate retention rebates, whereas previous studies stopped short of examining these aspects. Finally, as means to illustrate the impact of the graduated rate structure on human capital investment, the CTaCS database affords a number of simulation opportunities to examine the implications of having an individual graduate earn at various quantiles over their lifecycle. To provide a degree of semblance with previous studies and add further fodder for discussion we also use earnings data from the 2006 Census for our empirical analysis. Findings show that tax systems in the Atlantic Provinces tend to create additional disincentive effects, when compared to non-Atlantic; Nova Scotia and PEI have a particularly ominous outlook for taxation of human capital over the last 50 years in that their treatment remains comparatively poor, when examined in relation to other provinces in our study. Of course, this does not imply that the tax treatment of human capital has not become more favorable, when compared to, say, its treatment in 1962; indeed it has. What it is meant to imply is that when compared with what other provinces have done in terms of tax policy, these two, in particular, consistently find themselves at the highest end of the effective tax rate spectrum, which is a rather unenviable position. In addition, we find an interesting dichotomy in our bilateral comparison of Nova Scotia and Ontario graduates. In particular, items such as the graduate tax credit and the more recent graduate retention rebate go some way to reversing the disincentive effect associated with the higher rate structures in Nova Scotia, returning both males and females to an after-tax return comparable to their Ontario counterparts. Of course, the design of the graduate retention rebate was not to reimburse individuals to a point of return neutrality, if you will. It was designed as an incentive to remain in or to potentially relocate to the respective province. In this regard, the current policy appears somewhat unsuccessful in its mandate. The rest of the paper is organized as follows. In the next section, we provide some motivation and a primer on relevant tax implications. We follow this with a discussion of the methodology used to assess the tax (dis)incentive effects for human capital investment. Our results follow and, finally, we conclude with some remarks and avenues for future research. Motivation and Primer Taxation has changed remarkably from the time of Carter (Figure 1 ). Provincial governments have largely followed the lead of the federal government, by first applying a tax on tax approach to collecting revenue before migrating to the tax on net income approach used today (see Appendix for a detailed look at the Atlantic Provinces). Deductions have increased and surtaxes have, for the most part, decreased or been eliminated.
doi:10.1016/j.qref.2014.02.003 fatcat:3z76wilugvhaxat4yplbtt7cv4