How not to fight income inequality

Posted on April 24, 2015 in Debates – Full Comment
April 23, 2015.   Editorial

Income inequality, as anyone who follows the news will know, is the cause of the moment. Self-proclaimed “progressives” bemoan a widening gap between upper- and lower-income Canadians, demanding governments fix the problem by raising taxes on the rich. Nova Scotia did so in 2010, Ontario in 2014, New Brunswick in 2015 and there are calls for Ottawa to do the same. According to a 2013 survey by Ipsos Reid, nine in 10 Canadians think the rich should be taxed more heavily.

Yet according to a recent report for the MacDonald Laurier Institute by Philip Cross, former chief economic analyst at Statistics Canada, Canada already has a highly progressive system of income redistribution. Taxes, however, are only part of the picture: the real issue is transfers. The report finds that between 1976 and 2011, the amount of tax paid by middle- and lower-income Canadians declined, while transfer payments to these groups increased. Meanwhile, the amount of taxes paid by upper-income Canadians grew, and grew, without a corresponding increase in transfers.

The result has been an ever-greater redistribution of income from higher to lower earners. Those in the bottom fifth, or quintile, currently receive half their income from transfer payments; those in the next quintile, a quarter of their income. Meanwhile 80 per cent of all transfers are paid by the top quintile of earners; their incomes are reduced by 20 per cent, on average, just for that purpose.

By contrast, Canada’s lower and middle classes are both significant and growing net beneficiaries of the tax and transfer system. While their wages may not have increased at the same pace as those of upper income earners, the value of the transfers they receive from that group has grown substantially. Contrary to a thousand op-ed pieces, the result has been to reduce income inequality, not increase it.

The report concludes: “With marginal income tax rates approaching 50 per cent in the largest provinces, this limits the capacity to further redistribute incomes via the tax and transfer system. Instead of focusing on modifying taxes and transfers to redistribute income, it would be better to adopt policies that boost market incomes for all classes.”

Policies designed to increase trade, productivity, investment and profit will lift more Canadians out of poverty than further carving up the incomes of the very rich. More redistribution is not the answer, even if anyone knew what the question was.

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