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Macdonald-Laurier Institute

How the 1% is torquing our debates about inequality: Sean Speer in the Financial Post

May 1, 2017
in Columns, In the Media, Latest News, Sean Speer
Reading Time: 4 mins read
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Sean SpeerMisperception abounds about the much-pilloried top “1%” of income earners, writes Sean Speer. The 1%, far from an immovable caste, is constantly changing, contributing more to tax year after year and shrinking in percentage compared to the rest of the population.

This column is based on Sean Speer’s recent paper called “Taxing the 1%: The limits of redistribution and a plan for inclusive growth”.

By Sean Speer, May 1, 2017

Polls show that U.S. President Donald Trump is deeply unpopular among Canadians. A net approval rating of just 15 per cent captures a broad-based animus for the president’s bravado and divisiveness. An eventual visit will invariably be marked by protests and other signs of opposition.

There are, however, roughly 268,505 Canadians — the much-maligned top one per cent of tax filers — who should have a more positive predisposition to Mr. Trump. That’s because, by all accounts, his musings about tax policy deterred the Trudeau government from further raising taxes on high-income earners in the latest federal budget.

It’s still too early to say whether it’s a short-term respite or a broader re-examination of Ottawa’s notion of what constitutes a “fair share.” But it’s fair to assume that these tensions between freedom and equality, efficiency and equity, and reward and redistribution will continue to loom large in our politics.

Just because these questions are often underpinned by deeply held values and political preferences doesn’t mean that data and evidence cannot be brought to bear.

Misperceptions about who are the one per cent, how much they earn, how much they pay in taxes, and how much this cohort changes year over year don’t explain away all our political disagreements. But correcting them with facts certainly can’t hurt. The latest data from Statistics Canada are from 2014.

Just because these questions are often underpinned by deeply held values and political preferences doesn’t mean that data and evidence cannot be brought to bear.

The top one per cent comprises those with a total income of at least $227,100 per year. Their average income grew slower than average income growth for all tax filers between 2009 and 2014. The one per cent is now responsible for 10.3 per cent of national income, which has been unchanged for the past few years and is a smaller share than it was in 2006.

The top one per cent pays 20.5 per cent of total federal and provincial (or territorial) income taxes. Their share of total-income-taxes paid has generally increased over the past 30 years, while the bottom 50 per cent saw their share of income taxes paid fall over this same period, from 5.0 per cent to 4.3 per cent.

Those who make up the top one per cent aren’t the same people year after year. There’s considerable fluidity in the group: 27.9 per cent of this group join or leave each year, while every five years there is a turnover of a full 48.5 per cent. And this level of churn has been generally constant for the past 20 years.

So this is hardly a caste system. Indeed, new research shows that age is a greater determinant of wealth inequality in general and of membership in the one per cent in particular than other, more-commonly assumed factors. Yet we hear no calls for a “seniors tax” (not counting our satirical demand last year for one from the Macdonald-Laurier Institute.)

As for the one per cent’s share of the tax burden, it shouldn’t come as a surprise that it’s been generally rising. The federal government and seven provinces have raised income taxes on them since 2010. And there are now six provinces with combined top marginal tax rates exceeding 50 percent. There are political questions about whether such tax rates amount to “confiscation” as NDP leader Thomas Mulcair said in the last federal election.

But there are also empirical questions about the effects that such heavy tax rates have on the behaviour of high earners, and the resulting impacts on economic activity and government revenues. There’s some debate about the extent to which high marginal tax rates influence individual decisions and in turn impose costs, but there’s no real dispute over the basic premise that taxing highly skilled people too much will have negative consequences. The only disagreement is about what degree is “too much.”

That the Trudeau government deferred prospective tax hikes because of the Trump administration’s outstanding tax policy is a sign that, notwithstanding its “fair share” rhetoric, it recognizes the dynamics of tax competitiveness and the limits of redistribution.

As it waits to see what tax reforms come from the Trump administration, it would be prudent to shift its emphasis from fair shares to another Liberal priority, inclusive growth. Here the Trudeau government has made progress in advancing an agenda focused more on equal opportunity than on equalized outcomes. The Canada Child Benefit and the latest federal budget’s new caregiver tax credit are positive steps, for example, but there’s plenty more to do, particularly for indigenous communities and those experiencing persistent poverty.

Ottawa’s decision to hold off on further taxes on high-income earners in response to the prospect of U.S. tax reform may thus be an impetus for a bigger rethink about government priorities. The outcome can be a renewed focus on broad-based opportunity instead of a zero-sum game.

Sean Speer is a Munk senior fellow at the Macdonald-Laurier Institute.

Tags: Financial PostSean Speer
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