Tax policies may aggravate gap between rich and poor
TheStar.com – news/Canada
Published On Fri May 27 2011. Les Whittington, Ottawa Bureau
The Conservatives, who will soon deliver their post-election budget, are championing a set of plans that may accelerate Canada’s growing gap between rich and poor, a sign of inequality that has already reached troubling levels.
As in many other countries, Canada is witnessing a phenomenon in which the most wealthy are enjoying stunning increases in their income while the rest of society stagnates. It’s something that Finance Minister Jim Flaherty is likely to hear about in no uncertain terms in the parliamentary debate following the tabling of the budget on June 6.
The trend (long summarized as “the rich get richer while the poor get poorer”) is so pronounced globally that Angel Gurria, head of the industrialized world’s main think tank, is warning that income equality is becoming a “serious threat.”
Gurria, secretary-general of the Paris-based Organization for Economic Cooperation and Development (OECD), said in early May that disparities in income between those at the top and those at the bottom continued to grow even during the decade of global economic expansion prior to the 2008 recession.
“If in the decade of the strongest economic expansion inequality increased, what will happen now?” Gurria asked in a speech in Paris. “Halting the scary outlook of increasing inequality is more urgent than ever.”
In a 2008 study of 30 OECD countries, Canada was singled out as one of the member nations that has witnessed the worst widening of the wealth gap.
Inequality and poverty declined in Canada for 20 years before the late 1990s, the OECD study said, but since have gotten much worse. Among OECD nations, only Germany saw as sharp an increase in inequality of household earnings, the report found.
“In the last 10 years, the rich have been getting richer, leaving both middle and poorer income classes behind,” the OECD said of Canada.
How pronounced is the income gap? According to Toronto research agency Investor Economics, the richest 3.8 per cent of Canadian households controlled 66.6 per cent of all financial wealth (not counting real estate) by 2009, up from 60.6 per cent in 2005, just before Prime Minister Stephen Harper’s government came to power. Looking ahead, the agency predicts the portion of financial wealth controlled by this richest group of Canadians is headed for 70 per cent by 2018.
And some analysts say the economic strategies being pursued by a re-elected Harper will only make matters worse, leading to a further expansion of the income gap between the very rich and others in Canada.
The crux of the issue concerns the Conservatives’ plan to continue implementing corporate income tax cuts and to eventually bring in other tax breaks, such as expanding deposits in Tax-Free Savings Accounts and allowing two-income couples with children younger than 18 to split their income for federal tax purposes.
While these measures have been promoted as ways of creating jobs or helping average Canadians, some economists say the benefits to the rich from these tax breaks will far outweigh anything seen by other members of society.
Despite running a $30 billion budget deficit, the Harper government will phase in another round of corporate income-tax reductions, worth $6 billion in forgone revenue, next year. The cuts are part of $60 billion in business tax breaks under Harper.
Because they boost corporate profits, the cuts indirectly reward the rich, who reap the vast majority of earnings from Bay Street investments, says Jim Stanford, the Canadian Auto Workers economist. He cites Canada Revenue Agency data from 2008 showing that two-thirds of all taxable income from company dividend payouts to shareholders and three-quarters of all taxable capital gains from investments went to tax filers with income in excess of $100,000 — a group that represents about 5 per cent of all taxpayers.
Also, the argument that corporate tax cuts are needed to boost economic growth and generate jobs has been a tough sell lately. That’s because Canadian companies, despite extensive tax reductions, have been reluctant in recent years to make the investments in machinery and equipment needed to strengthen the country’s economic prowess.
“In my reading of the economic literature, they (corporate tax cuts) have had no visible impact on investment spending or job creation, says Stanford. “What they have done is further enhance profit levels, measured as a share of Gross Domestic Product, which are at all-time highs already.”
The corporate tax reductions, introduced by Flaherty in 2007, have already been approved by Parliament and won’t be a budget item on June 6.
Nonetheless, Peggy Nash, the new NDP finance critic, says her party will do everything possible to persuade the Conservatives to rethink the corporate tax breaks.
“We think that’s the wrong direction to go in,” she said. “We’ve seen several companies that have taken hefty tax cuts and then closed their doors and then shipped jobs out of the country.” The NDP will argue that, with 1.5 million Canadians still out of work, corporate tax breaks should be directly tied to each company’s job-creation record, she said.
In the election campaign, the Conservatives also promised, once Ottawa’s books are balanced, to bring in income-splitting on tax returns for families with dependent children.
The measure, which Harper says will cost Ottawa $2.5 billion annually in forgone revenue once fully implemented, is intended to help families that choose to have one spouse stay home to raise children. But economists point out that the measure will do nothing to help single parents, who account for one in five families with young children and have the highest rate of poverty in this country.
Also, couples where both parents work but have roughly equal incomes would see little tax benefit. Only families where one spouse stays at home while the other makes top dollar would reap large benefits — in some cases with tax savings of more than $6,000, economists estimate.
“The families that will most benefit from Harper’s income-splitting promise will be those who need the least help,” says Armine Yalnizyan, an economist with the Canadian Centre for Policy Alternatives. “The higher the income, the bigger the tax break.”
On the way to winning a majority government, the Conservatives also pledged, when the books are balanced, to double the contribution limit for Tax-Free Savings Accounts (TFSAs). Currently, anyone 18 and older can invest $5,000 annually, with interest accumulating free of tax.
While 4.7 million Canadians have opened a tax-free account, some economists argue that this savings vehicle largely benefits upper income earners. Only well-off Canadians have enough cash left over after paying their bills to maximize their contributions to TSFAs, these analysts say.
A study by the Consumers Council of Canada found that investors in tax-free accounts tended to be older and richer than the average in Canada, whereas younger people were saddled with large household debts.
“In the wake of the global economic meltdown, a lot of people are having trouble finding any money to save at all,” the CCPA’s Yalnizyan said.
Taking into account the Conservatives’ overall tax-reduction agenda, economist Erin Weir says these measures “also worsen inequality by reducing the public revenues available to fund social spending that benefits ordinary Canadians and helps alleviate poverty.”
“The growing gap between the rich and the rest of us has many causes, including higher remuneration for top earners, much higher profits as a share of the economy, less bargaining power for workers, and less progressive taxes,” says Weir, senior economist at the International Trade Union Confederation. “Conservative tax policies will clearly aggravate the problem.”
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