Canada’s 1% already well occupied

Posted on March 8, 2014 in Equality Delivery System – FP/FP Comment
March 5, 2014.   William Watson

Well-educated people putting in lots of hours have big financial payoffs, pay more taxes

The rich are different from you and me, to paraphrase F. Scott Fitzgerald’s famous comment to Ernest Hemingway. “Yes, Scott,” would be your answer if you’d attended a recent conference on inequality put on by Montreal’s Institute for Research on Public Policy, “they work a lot harder than the rest of us.”

It turns out the top 1% of earners, which so occupied the Occupy movement, is already more than fully occupied. One of the conference presentations, slides of which are nowavailable online, looked at hours worked by top-earners. According to the 2006 census, Thomas Lemieux and Craig Riddell of UBC reported, 54% of the top 1% worked more than 50 hours a week. By contrast, only 18.2% of the rest of us reported working that much.

On the other hand, 12.2% of top earners did not report working any hours at all. (That compares with 38.2% for the rest of us.) The best of all possible worlds, you might think, would be to be a top earner without any working hours — though perhaps there’s some problem with how people are answering the census questions about work. Another conference paper showed that although top-earners do earn big salaries, straight salary usually represents a small portion of their compensation. As a rule, they have a piece of the business. What really raises them above the rest of us is their stock and options.

These days the rich are also different from you and me in being more educated. More than a fifth of top earners have a graduate degree and another 12% went to medical or dental school. That compares to only 6.2% of the rest of us having graduate degrees and only 0.5% being doctors or vets.

If you look at what top earners studied in university, 37.1% graduated in five key fields: business, medicine or dentistry, financial management, law or economics. (Personally, I’m not so convinced economics is the key to the golden door.) That compares with just 6.6% of the rest of us having degrees in these areas.

So: Well-educated presumably smart people putting in lots of hours in areas that seem likely to have big financial payoffs. Maybe it makes sense that they’re making bigger bucks than we are.

On the other hand, we 99 percenters may be making the deserving rich even richer by giving them tax breaks they don’t need and we shouldn’t pay. Thus Michael Veall of McMaster University, Brian Murphy of Statistics Canada and Michael Wolfson of the University of Ottawa looked at the impact of federal tax expenditures by income group.

The top 1% aren’t tax slouches. They pay more than 20% of all federal income tax. But they do disproportionately benefit from some tax expenditures. For instance, they get over 70% of the total benefit of the partial inclusion of capital gains from income and almost 80% of the benefit from different investment tax credits — which are usually politically-motivated boondoggles in any case.

Well-educated presumably smart people putting in lots of hours in areas that seem likely to have big financial payoffs. Maybe it makes sense that they’re making bigger bucks than we are

Their dollar haul from the partial inclusion of capital gains is over $2.5-billion— though that assumes, almost certainly incorrectly, that the fiscal regime has no effect on the aggregate value of such gains. If a tax expenditure is fair and efficient — for instance, the dividend gross-up and credit exists to prevent the double taxation of corporate profits — then the fact that one percenters use it most is irrelevant. But if it’s of dubious merit and, besides, the benefits go mainly to people at the top, then it’s twice damned. You’d think some political party or other would notice.

Though getting tough with high earners is an increasingly popular policy it’s not necessarily a wise one. Michael Smart of the University of Toronto and Kevin Milligan of UBC investigated what would happen if each province raised its top marginal rate of income tax by five points. It turns out top incomes are quite sensitive to tax rates so in most cases the tax hike doesn’t raise a lot of revenue. Because of the hit to incomes, however, it lowers federal tax revenues by more than the increase in provincial revenues. Don’t tell Quebec Premier Pauline Marois. She’d find it irresistible.

Andrew Heisz and Brian Murphy of Statistics Canada looked at the degree of progressively in our current tax and transfer system. People tend to assume that with some tax rates down and some social programs rationalized — and fiscal conservatism dominant — the system is less progressive than it used to be. In fact, taxes are taking a smaller share of output but are doing so in a more progressive way. The same is true of a number of fiscal benefits, including those for children, for example. Levels may be down or flat but spending is more income-tested than it used to be. So a (slightly) smaller state may be moving at least as much money from top to bottom as a bigger one used to.

Finally, Morley Gunderson of the University of Toronto and Tony Fang of Monash University looked at the recent labour market experience of six vulnerable social groups: young people not in school; aboriginals; recent immigrants; lone parents; persons with disabilities; and people 45-64 living on their own. They found that these groups had quite different experiences over the last couple of decades, which suggests a one-sized anti-poverty policy won’t fit all. But they did conclude, in what may have been the conference’s best line, that good macroeconomic policy is an exception: “A rising tide seems to raise all boats, including those that otherwise seem anchored to the bottom.”

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