Paul L. Caron

Wednesday, February 15, 2023

Smart Presents Distributionally Sensitive Cost Benefit Analysis Today At Toronto

Michael Smart (Toronto; Google Scholar) presents Distributionally Sensitive Cost Benefit Analysis at Toronto today as part of its James Hausman Tax Law and Policy Workshop Series hosted by Benjamin Alarie:

Michael smartI review the case for and against the use of a distributionally weighted sum of gains and losses in cost-benefit analysis. I conclude that distributional weighting is logically consistent and ethically justified in cases where policy reforms have direct effects on inequality in pre-tax incomes of individuals. I show how distributional weights can be calculated for Canada using information on income inequality and effective tax rates in the income tax system. I apply distributional weights to evaluate a recent proposed merger with presumed anticompetitive effects in Canada’s telecommunications sector.

Concluding Remarks
The methods described here offer a robust, data-driven approach for determining how the potentially adverse distributional consequences of mergers could be taken into account in evaluating the efficiencies defence under Section 96 of the Competition Act. Examining effective tax rates by income group, I found that the Canadian tax system exhibits a relatively modest preference for redistribution from rich to poor, reflected in a distributional weight on the richest group that is about 30% lower than average.

It is a straightforward matter to apply these weights to the transaction that is the subject of this proceeding. If the Tribunal were to adopt a weighted surplus approach in the way I have described, my calculations indicate that consumer surplus should receive a weight in this case that is approximately 1.32 times the weight accorded to producer surplus. Those relative weights are consistent with the degree of concern for redistribution exhibited through my analysis of the income tax system, and with the patterns of cellphone expenditure shares and shareholder income by income group. 

In Superior Propane, the Tribunal determined that only individuals in the bottom 20% of incomes would receive a higher distributional weight than producers in the weighted surplus calculation. If that were done in this case by setting the weight on the top three quintiles equal to that of the top one percent, then the social weight on consumer surplus would fall to approximately 1.00 from 1.32. As I explained earlier, this reflects the low expenditure and ownership shares in the bottom deciles, as well as the presumed effect of the transaction on tax revenues.

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