A chance to get it right, for once, on taxing the rich

The debate about topend income concentration in Canada always seems to get the timing wrong. Last week, Statistics Canada released their estimates for incomes of high earners in 2014, but they received little attention. Even though the phenomenon of income concentration — usually characterized as the share of total income going to the top one per cent of high earners — has emerged as a pressing concern, the trends in Canadian data have not matched those of the public imagination.

This doesn’t mean that the increase in income concentration never happened, of course. In the early 1980s, 7 per cent of total income went to the top one per cent; 20 years later, that share had increased to 12 per cent.

The problem was that this surge largely went unnoticed at the time. Available income distribution data usually divided the population into five or 10 income groups, obscuring the trends at the very top. It wasn’t until 2003 that McMaster University’s Mike Veall and Emmanuel Saez of the University of California at Berkeley circulated a working paper that used individual tax files. Veall and Saez found that the data up until 2000 mirrored the trends towards increased income concentration that had already been identified by Saez in U.S. data. In a 2010 update, Veall noted that the trend had continued through to 2007.

By this time of course, the global economy was in the throes of the financial crisis and the issue had become front-page news. Over the next few years, several parties at both the federal and provincial levels promised and implemented increases in tax rates on high earners in order to redistribute income to those further down the income distribution. Debate has mainly focused on how large the revenue increase would be generated by higher taxes (the consensus estimate: not much).

Even as the debate evolved about the implications of income concentration and what might be done about it, the trend had already reversed: the income share of the top one per cent peaked in 2006. Since 2006, income growth throughout the bottom 99 per cent of the income distribution has outstripped that of the top one per cent. Moreover, these gains were uniformly distributed: the average gains in the bottom half, the median and those between the 50th and 99th percentile saw similar increases in real purchasing power. Meanwhile, those at the very top — the top onetenth of one per cent and higher — have actually seen their real incomes decline since 2006. And so it was with last week’s Statistics Canada data release, which was consistent with the general trend of income growth continuing to favour the bottom 99 per cent.

So the debate about income concentration has been out of sync with the data. When the Canadian top one per cent was gaining a larger share of total income, few noticed. And when people finally did get around to noticing, the trend had already reversed. As a result, Canadian interest in the topic has waned considerably from the Occupy days.

But there are a couple of reasons for thinking that yet another turning point has been reached, and that the tide will turn again in the one per cent’s favour. The most popular explanation for the original surge in top-end incomes is that employers were obliged to pay higher salaries in order to keep top performers in Canada, and similar conditions are re-establishing themselves.

In the 1980s and 1990s, the low Canadian dollar made it particularly difficult for Canadian employers to retain or recruit talent, forcing them to offer higher salaries in order to remain competitive with U.S. employers. One of the effects of the strong Canadian dollar during the resource boom was to make U.S. salaries less attractive, which reducing the upward pressure on salaries. But the decline in oil prices that began in 2014 and the subsequent depreciation of the Canadian dollar is likely to restore some of the bargaining power of Canadian high earners.

In addition, Donald Trump’s election victory and the near-certainty of a reduction in top U.S. income tax rates will widen the gap between the marginal income tax rates faced by high earners in Canada and the United States. Canadian governments may have to reconsider those increases in top tax rates.

One of the more persistent themes in Canadian tax policy — going back to at least the 1966 Carter Commission — is the need to keep top Canadian rates in line with those in the U.S. in order to dissuade highskilled Canadians from emigrating. If U.S. taxes are reduced, than Canadian employers will be obliged to offer higher pre-tax salaries in order to match U.S. after-tax incomes. These considerations were behind the reductions in top rates in the 1970s and again under the Chrétien government.

The Canadian debate about income concentration may at last be in sync with the data: attention will be turned on the one per cent at the same time as their income shares are increasing. But the most popular policy remedy — higher tax rates for the rich — risks making the problem worse.