Why the rich are richer
Income: groups distinct 2012 in
It may be one of the strangest aspects of the federal election campaign to date: Liberal Leader Justin Trudeau pledging to hike income taxes for anyone earning more than $200,000 annually.
The odd part is not that he is taking aim at people such as himself — the top one per cent of Canadians in terms of income. Rather, it’s that the policy would attempt to reverse what happened during the Liberals’ stretch in office from 1993 to 2006. That’s when the “One Percenters” substantially improved their relative position, as their share of the country’s after-tax income surged from 6.3 per cent to 9.7 per cent — a far bigger jump than any other major income group.
The Liberals, under Jean Chrétien and Paul Martin, did not set out to produce this result. They simply pushed ahead with an agenda that favoured economic growth, which was helped by a dramatic economic recovery in the United States, Canada’s largest trading partner. The rise in corporate profits triggered a wave of executive bonuses and increases in stock-based compensation, especially during the 1990s tech boom. All groups enjoyed gains in real income, but the top earners gained the most.
Achieving a fair division of economic spoils is one of the most difficult things for a country to get right.
When there’s too much equality — if, for example, governments tax top earners too much — entrepreneurs don’t see enough incentive. When there’s too little equality — if the top earners vastly outstrip everyone else — resentment builds among middle- and lower-income citizens.
It’s a political vein being tapped to great effect south of the border by Democratic Party presidential hopeful Bernie Sanders. The Vermont senator’s popularity has been climbing sharply along with his attacks on the One Percenters in the United States.
While top earners in the U.S. take home nearly double what their counterparts in Canada do, it’s no accident the leaders of Canada’s main opposition parties are pushing a similar agenda of income fairness during this election campaign.
Since the early 1980s, Canada’s ‘One Percenters’ — the top tier of all income earners — have seen their share of the pie increase substantially as the country enjoyed economic growth. How did that happen? As the Ottawa Citizen’s James Bagnall explains, achieving a fair division of spoils is rather tricky, and very political.
Trudeau and New Democratic Party Leader Tom Mulcair are promising more middle-class jobs by investing in urban infrastructure and clean technologies. Each has also announced measures to help families with childcare expenses — the Liberals through a tax benefit, the NDP with a national childcare program o ering spaces at less than $15 per day.
The Liberals have also proposed cutting marginal tax rates for individuals on incomes between $44,700 and $89,400 — which will be paid for in part by hiking the marginal rate for anyone earning more than $200,000.
For their part, the Conservatives appear satisfied with the status quo they created. During their decade in o ce, they trimmed taxes on personal incomes and small businesses, and slashed the goods and services tax to five per cent from seven per cent. More recently, they have introduced or expanded programs — such as the Registered Education Savings Plan and TaxFree Savings Account — that o er the most benefits to those in higher tax brackets, including many in the middle class.
The odd thing is, the rise of the One Percenters stopped dead almost from the moment Conservative Leader Stephen Harper was sworn in as prime minister in 2006. And by 2012, the after-tax share of the country’s income for the top earners fell from 9.7 per cent to 8.4 per cent. Again, this was not the intention of Tory policy. It’s not clear why their share slipped from 2006 to 2008, when corporate profits in Canada were strong and the economy was growing. But the upper income earners were certainly hurt by the 2008-09 financial crisis and its aftermath. Corporate profits as a percentage of GDP have yet to recover to pre-crisis levels.
“Companies cut compensation with the slide in business,” says Michael Veall, an economics professor at McMaster University and expert on income distribution in Canada. “In the public sector, the rate of increase of top compensation fell as governments were pushed into deficit,” he added.
In the resource-rich provinces, income inequality lessened at a faster pace between 2006 and 2012 as the general slide in top incomes was more than matched by the rise of hourly wages among the bluecollar trades.
“Since less-educated and younger workers have benefited disproportionately from the resources boom, the increase in their wages has resulted in a decline in earnings inequality in Newfoundland & Labrador, Saskatchewan and Alberta,” Nicole Fortin and Thomas Lemieux note in Changes in Wage Inequality in Canada, a summary of research to be published in the Canadian Journal of Economics.
With the collapse in global oil prices last fall, this rare pattern has likely already ended.
For leaders of political parties and policymakers alike, the pattern of income growth for the past few decades has been a conundrum. The data suggests that incomes converge most strongly during weak economies. And when growth returns, so does inequality, even though incomes at all levels may rise in real terms.
DOES INEQUALITY MATTER?
“Too much inequality undermines a healthy society,” says Andrew Jackson, a senior policy adviser at the Broadbent Institute, an Ottawa-based research group. “Canadians might not endorse (complete equality) but they certainly believe that all children should have a fair chance in life.”
Jackson, a former chief economist of the Canadian Labour Congress, believes that in the absence of policies that redistribute wealth, Canada’s middle will continue to struggle while “those at the very top, especially the top 0.1 per cent, will likely continue to pull away from the rest of us.”
But it’s one thing to propose courses of action that seem fair — such as legislating higher marginal income tax rates for the rich or more punitive income surtaxes. It’s quite another to implement policies without creating unintended consequences. Entrepreneurs and the wealthy, but especially corporations, are quite capable of shifting location if governments overreach in their attempt to make things fairer, or at least more equal.
And, if there is one inference we can draw from the pattern of income growth since the early 1980s it’s this: politicians who say they want growth are really also saying there will be more income inequality. For the past few decades it’s been the going price of economic success, and no one seems to have an answer for how to simultaneously deliver economic growth and greater income equality.
THE GREAT COMPRESSION
This wasn’t the case immediately following the Second World War, when there occurred what economists Claudia Goldin and Robert Margo called the Great Compres- sion. Hourly wages grew so robustly they outpaced upper income growth. It was a time when working class Canadians could aspire to a middle-class lifestyle.
Top incomes did grow, but the One Percenters’ share of the total pie shrank by half from the 1940s to late 1970s.
The trend appeared to confirm the prevailing wisdom that as countries industrialize, the extreme inequality of the early years gives way to a more equitable sharing of the rewards of the new economy, in part through a progressive tax system. So it proved, at least until the early 1980s when suddenly, and somewhat mysteriously, the pattern reversed. The middle and working classes were no longer ascendant.
“Income inequality increased even though real incomes rose across all groups,” Andrew Heisz notes in Income Inequality: the Canadian Story, which will be published this fall by the Institute for Research on Public Policy, an independent group in Montreal. “Income increases for those at the low end generally were smaller than increases for those at the middle and especially at the top.”
Indeed, Canada’s top income earners have since recouped about half the share they lost during the Great Compression while in the U.S. the One Percenters have recouped nearly everything.
The question is: why did the trend reverse? Mid-1990s cuts by the Liberals to social transfers such as employment insurance are part of the story. But most of the explanation lies elsewhere.
For instance, Western economies such as Canada’s have experienced a significant shift toward high-paying jobs requiring intensive education.
“A movement toward management and professional occupations and away from production, crafts and (similar) occupations has been ongoing since at least 1971, although that trend has slowed down in recent years,” note David Green and Benjamin Sand in Has the Canadian Labour Market Polarized, a summary of a research article to be published soon in the Canadian Journal of Economics.
Evidence of this can be seen in the changing makeup of Canada’s gross domestic product — the value of all goods and services produced here. The relative contribution of firms that provide legal, architectural, engineering and computer systems services more than doubled in real terms between the 1990s and mid-2015 while GDP as a whole grew just 55 per cent.
Meanwhile, many employers have outsourced work at the other end of the income spectrum to lower-wage countries, a trend that has weakened blue-collar unions.
Overall union membership in Canada has slipped from nearly 38 per cent of the workforce in the early 1980s to 30 per cent in 2012. Weaker unions are less capable of defending the interests of workers.
But perhaps the best explanation for the rise of the One Percenters is the growing importance of investment income, bonuses and stockbased compensation. In good times, when corporate profits are rising, the non-salary portion of income tends to rise very quickly. This is especially true in the hightech economy, which has produced disproportionately high rewards for founders and key employees.
And, under the current economic system, there may nothing that political parties — no matter their stripe — can do to change this.
RISE OF THE ONE PERCENTERS
In the last three decades, the One Percenters have increased their share of the national income by 2.6 percentage points. This was thanks to a 68 per cent jump in average after-tax incomes to $300,700 — compared to income gains of less than 14 per cent for taxpayers in the bottom 90 per cent of income earners. Individual taxpayers in the top one per cent to 10 per cent group saw real incomes rise 33 per cent. Their share of the income pie was up 1.2 percentage points.
Clues about why this has happened can be found by looking at key economic events in Canada’s largest cities. For example, incomes for Ottawa’s One Percenters grew much faster from 1998 to 2000 than in any other city, due to the technology boom. The top one per cent, representing fewer than 6,000 people, saw average after-tax incomes surge 70 per cent.
In Edmonton and Calgary, the One Percenters began winning a disproportionate share of income in 2002, as the oil industry began its recovery.
But in all cities, the One Percenters now claim significantly more of the collective income than they did during the 1980s. In 2012, Ottawa’s One Percenters accounted for seven per cent of the city’s total after-tax income, compared to roughly 8.5 per cent for Montreal and Edmonton, 9.6 per cent for Vancouver, 11.4 per cent for Toronto and 13.3 per cent for Calgary.
If Canada’s economy does su er a downturn, the gap between the top and middle income earners will likely close some more, and the politics of inequality may not matter. But if we are through the worst of the oil-led weakness and growth returns, inequality will be on the rise again and debates about the appropriate share of the One Percenters will return with force.