The gap between the rich and the rest is widening, with Canada’s top earners seeing one of the highest increases in income shares of any industrialized country.
Top earners have seen their share of total income grow in most nations over the past three decades. But they’ve risen faster in English-speaking countries, according to an OECD analysis that examines changes in income concentration at the top of the distribution. It found Canada’s top earners have seen the second-highest rate of growth, after the United States, among 18 countries measured. In other words as overall incomes increase, those at the top of the pay scale are taking the lion’s share.
Gap between the rich and the rest, 1990-2010
Share of income for top 0.5%, 1%, 5% of Canadian earners between 1990 and 2010
SOURCE: World Top Income Database
The study showed the top percentile of earners captured about 47 per cent of total growth in pretax income in the U.S., 37 per cent in Canada and about 23 per cent in Australia and Britain.
In both Canada and the U.S., the further up the income ladder, the faster the gains.
Several factors are driving the growth, among them technological shifts, changes in tax policies and the rise of “superstars” with a global war for talent driving their pay higher. In Anglo countries in particular, the paper suggested growth in the financial sector may be playing a role, influencing other sectors’ compensation plans by, for example, increasing emphasis on stock options.“The disproportionate surge in top incomes helps explain why so many people have not felt their incomes rising in line with national GDP growth,” the paper said.
The Organization of Economic Co-operation and Development isn’t alone in cautioning countries over growing inequality, which has become a central topic of debate. The International Monetary Fund, too, has made the income gap an area of growing focus and has argued that inequality makes economic growth less durable.
Trends are not uniform. In Nordic countries along with France, Italy, Portugal and Spain, the bottom 99 per cent of the population benefited in the three decades up until the financial crisis, garnering about 90 per cent of the increase in total pretax income, the study said.
Still, the gap is expected to widen further in the coming years, and the OECD is urging countries to rethink their tax policies, many of which have become less redistributive. “Without concerted policy action, the gap between the rich and poor is likely to grow even wider in the years ahead,” said OECD Secretary-General Angel Gurria. “Therefore, it is all the more important to ensure that top earners contribute their fair share of taxes.”
Tax reforms in almost all OECD countries have cut top personal income tax rates along with other tax rates affecting the highest income earners, the analysis said.
In response, governments have several options they could adopt to “increase effective taxation paid by top income recipients without necessarily raising their marginal rates,” the paper said. Possibilities include abolishing tax credits that disproportionately help high-income people along with reducing tax avoidance.
The debate over taxing the rich is heating up, in Canada and around the world. Ontario’s budget, due for release Thursday, is expected to hike taxes for those with incomes above $150,000. Amazon.com’s best-selling title is Thomas Piketty’s much-discussed new book, Capital in the 21st Century. In it, the French economist argues that wealth inequality is a natural consequence of capitalist systems, and that – most controversially – governments should implement a global wealth tax to close the gap.
In Canada, the top 1-per-cent’s share of total income was 10.6 per cent in 2011, down from a peak of 12.1 per cent in 2006, but higher than it was in 1982, at 7.1 per cent, according to Statistics Canada data.
The OECD paper, with calculations based on the World Top Income Database, examines pretax, not after-tax incomes, so the results would be different once taxes and government transfers are taken into account.