The tax axe is hovering over Canada’s wealthy

Posted on January 22, 2015 in Equality Delivery System – Full Comment
January 22, 2015.   Michael Den Tandt

It is the policy lever that, in Canadian federal politics at least, has been too hot to touch. But it is coming. It’s just a matter of time. Any Canadian earning, say, $150,000 or up should prepare to share the wealth, or at least more of it, because tax hikes for the rich are in the wind.

Madness? Perhaps. It’s been done in Nova Scotia, in 2010-11; and in Ontario, by the Kathleen Wynne Liberal government, in 2014. And now, since Tuesday’s State of the Union address in Washington, it’s a priority of the most powerful human on Earth. Even so, Ottawa could conceivably dodge the wave for another few years. That is increasingly unlikely, however, given the simple math.

Just this week, the charity Oxfam released a report on income inequality that made headlines around the world. The author, Deborah Hardoon, crunched data from Credit Suisse Group and found that, by 2016, the wealthiest one per cent on the planet will own more than 50 per cent of its wealth. In 2014, Hardoon found, the wealthiest one per cent owned a mere 48 per cent of global wealth, leaving 52 per cent for the rest of us. In other words, the spread is widening.

Moreover, even among the great unwashed of the 99 per cent, the disparities are huge. The wealthiest 20 per cent among them, Hardoon found, own virtually everything, leaving 5.5 per cent for the remaining 80 per cent.

Among the developed countries, Europe is generally most equal in terms of income, the United States least, and Canada somewhere in the middle. But the global trend has long been in evidence here, too. Mike Veall, an economist at McMaster University, working from tax-filer data going back to the 1920s, put up some striking numbers in a 2012 paper, entitled ‘A New Gilded Age – Recent Trends in Top Income Shares in Canada.”

In a nutshell, Veall found that Canadian income inequality peaked in the mid-1930s, when the top one per cent of earners accounted for close to 20 per cent of total income. But then, during the war years, a great reversal occurred, driven by wartime tax measures. By 1945 the one per cent accounted for only 10 per cent of Canadian income.

Through the ensuing three decades, during what many now remember as sepia-toned economically golden years, income inequality continued to abate. By the late 1970s, Veall’s data shows, the one per cent accounted for just 7.5 per cent of Canadian income. Then, round about 1982, in tandem with a liberalizing trend in governments in the United States, Canada and the United Kingdom, came another reversal. The spread began to widen again, with inequality increasing sharply through the mid 2000s, peaking in 2005, then slipping off its highs, to where it now sits, with the top one per cent of Canadians garnering 12.5 per cent of total income.

Yes, that’s right: Income inequality has actually eased slightly in Canada during the Harper years, though it remains high, in historical terms and the trends driving it – computerization, offshoring – appear locked in.

Here’s why the issue resonates politically: The modern rise in inequality has been disguised, in a sense, by the huge increase in women’s participation rates in the workforce since the late 1970s. Household incomes have benefited accordingly. But the average couple with children is working harder to stay afloat than it did, say, in 1967, for the obvious reason that the home still must be run, even if both spouses are working outside for pay.

In Ontario, in particular, this has been exacerbated by a related trend, polarization: High-wage manufacturing jobs have left, chasing lower-cost labour, to be replaced by relatively low-wage service and retail jobs, which themselves are not secure.

Economists have identified two principal levers for addressing income inequality. The first is education, to better prepare workers to succeed in an economy that increasingly requires complex skills. The second is tax policy. There is no gilding this lily; the soaring income inequality of the 1930s was reversed by governments that required the rich to pay a greater share. In Canada now that would mean establishing a new marginal income tax rate above the current 29 per cent, for anyone earning $135,000 or more.

We have a governing party that is, for now at least, determinedly going in the opposite direction. We have an opposition party, the New Democrats, whose leader has vowed never to increase personal income taxes; and we have a federal Liberal party that has, until now, doggedly avoided showing any of its economic cards, beyond generalities.

Logic tells us though, that one of the three – likely the Liberals – is eventually going to break cover on this issue, and ignite the debate. Given that 95 per cent of working Canadians earn less than $100,000 a year, it’s not hard to predict where that will eventually go. The rich will pay more.

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