“Be it resolved: tax the rich (more)” is the bold statement at Thursday’s Munk Debate in Toronto. The idea is partly simple expedience – for cash-strapped governments, that’s where the most money is. But it also reflects an inaccurate perception, held by many, that the distribution of income in Canada is becoming more unequal. In fact, the trend to rising inequality essentially stopped in 1998, when lower- and middle-income families began to recover after two decades of lower earnings.
At a time of floundering public finances, especially at the provincial level, it seems reasonable to ask the better-off in our society to shoulder a growing share of the tax burden. The United States and Europe have already moved in that direction. Canada’s provincial governments have raised taxes on the rich, with both Ontario and Quebec pushing their highest marginal tax rates as close as they can to 50 per cent, a psychological and political barrier after which people start working more for the taxman than for themselves, risking flight to other jurisdictions.
Most measures of income inequality show a long-term rise in the share going to the upper quintile. However, almost all of this increase occurred in the 1980s and 1990s – not in the past decade, when income distribution questions moved to the fore.
The rising share of pretax income going to the top 20 per cent of families between 1976 and 1998 reflected both falling real incomes for lower- and middle-income families and a 17-per-cent increase in the top quintile’s earnings. Income inequality has levelled off since 1998 because of a marked resumption of earnings growth for lower- and middle income families, whose gains nearly matched the 22-per-cent increase for top earners. This growth for all classes accompanied a resurgence in the resource and construction sectors and a notable narrowing of regional differences in unemployment.
For Canadians, the focus should be more rapid growth of incomes across the spectrum. It is instructive that income inequality was not hotly debated when income growth stalled in the 1980s and 1990s; this is a luxury indulged in only when incomes are growing sufficiently for attention to turn from wealth creation to distribution.
The tax and transfer system has reversed nearly half the polarization of income shares over the past three decades. The top 20 per cent of earners paid 58.3 per cent of all income taxes in 2010, up from half in 1976. The top 1 per cent of income earners alone pay 21.7 per cent of all income taxes. This reflects both the increase in their income and a sharp drop in taxes paid by lower income earners.
It is often overlooked how much the progressivity of the income tax system has steepened by exempting lower-income earners from paying taxes, or by lowering their rate. The lowest 40 per cent of households pay just 6.8 per cent of all income taxes, almost half their share in 1976, despite a higher absolute level of incomes. More than one-third of tax-filers pay no income tax.
Should the rich pay more? It depends partly on the motivation behind the question. If it’s a misinformed attempt to compensate for imaginary losses of lower-income people, the answer clearly is no. If the intention is to lower government deficits, the answer is that the better off have already seen their tax burden rise because of more government spending, which has driven debt higher despite rising tax revenues. At some point, lower spending rather than higher taxes has to be the solution to provincial debt problems.
Philip Cross, research co-ordinator with the Macdonald-Laurier Institute and former chief economic analyst at Statistics Canada, prepared a background note for Munk Debate participants.