Canada Income Inequality: Trickle-Down Tax Policy Is Alive And Well In The True North

First Posted: 12/01/2011 6:02 am EST Updated: 01/27/2013 12:29 am EST

NDP leadership hopeful Brian Topp launched the latest salvo in the clash between rich and poor Monday. Declaring growing income inequality to be today’s central economic issue, Topp detailed a series of proposed tax hikes on corporations and the wealthy aimed at narrowing the earnings gap.

Topp's proposals would see a rollback of some $18 billion in tax breaks enacted under successive Liberal and Conservative governments. His ideas come as many on the left in Canada have begun to question the direction in which Ottawa's tax policies have taken the country. Pointing to the income gap, they argue tax policy simply isn't as good at alleviating income inequality as it used to be. And new tax breaks — Tax-Free Savings Accounts and the proposed expansion of income-splitting to families— may only make things worse.

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Though the ideas are timely, they are part of a wider, generations-long ideological conflict.

In 1896, William Jennings Bryan declared that “There are those who believe that if you just legislate to make the well-to-do prosperous, that their prosperity will leak through on those below. The Democratic idea has been that if you legislate to make the masses prosperous their prosperity will find its way up and through every class that rests upon it.”

More than 110 years later, the struggle continues between those who believe lower taxes will lead to increased investment and greater prosperity and those who argue the wealthiest in society should pay for measures to help lift the least fortunate out of poverty. Proponents of low taxes, however, are getting their way in Canada.

Those who argue against the tax-cutting agenda point to the fact that wealth in Canada is increasingly concentrated among the wealthiest few.

During the period from the late 1950s to the late 1960s, the richest one per cent took home just 8 per cent of growth in total income. Between 1997 and 2007, before the financial crisis cooled the nation’s hot economy, the richest one per cent of Canadians took home 31.8 per cent of the growth.

The wealthy aren’t just taking more of the growth, they are taking more of the total income pie as well.

[From] 1980 to the present, the top one per cent’s share changed from about 8 per cent of all income to about 14 per cent of all income,” says McMaster University economist Michael Veall.

While those at the top are taking home more than they have in 100 years, real wages are actually falling at the bottom of the income spectrum. Between 1980 and 2006, according to Statistics Canada, median income for the bottom 20 per cent fell by $4000, or around 20 per cent once adjusted for inflation. During the same period, the top 20 per cent saw their median income grow by $12,000, or more than 16 per cent.

But this trend isn’t swaying the Conservative government’s steadfast belief in low taxes as the way to stimulate the economy.

“We’ve got one of the lowest tax regimes in the world now and we have businesses coming to Canada specifically saying ‘We came here to open a business because it’s a low-tax environment.’ When they come here they hire people. It’s simple,” says Minister of State for Finance Ted Menzies, pointing to the “120 different taxes” the Tories have reduced since 2006.

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Do you agree with Brian Topp's plan to raise taxes on the wealthiest Canadians?

Yes. Too few Canadians are sharing in the country's growing wealth, and this could help change that.

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And not everyone agrees that income inequality really is growing -- or that it should be seen as a problem.

“The whole notion of income inequality and that it’s growing is a complete myth,” says Neils Veldhuis, senior economist at the Fraser Institute.

“When you think about income inequality you’ve got to bring in mobility. Most of us at one point in time … were in the bottom 10 per cent or 20 per cent of income earners. So we were going to school, trying to make ends meet, working one or two jobs. We get out of school … you have a low paying job, you get some experience, you save some money. Twenty years from now you’re no longer in the bottom 20 per cent of income earners.”

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Yet there is no doubt wealthy Canadians are paying less tax than they did in the past. In 1948, the top marginal tax rate was 80 per cent on incomes over $250,000, or $2.37 million in today’s dollars. The top rate in 2009, averaged across Canada to account for different provincial rates of taxation, was 42.9 per cent for incomes above $126,264. The last time wealthy Canadians faced a tax burden this light was in the roaring 1920s.

The income tax system has become less progressive over time. In 1948 we had 19 tax brackets, we now have four, says Armine Yalnizyan, senior economist at the Canadian Centre For Policy Alternatives (CCPA).

Today, the top federal income tax bracket of 29 per cent kicks in at $128,800. There are no further brackets for higher earners. The United States’ system is actually more progressive, with six federal income tax brackets and a top rate of 35 per cent, kicking in it at $379,151.

“We’ve turned a progressive income tax system more and more into one that is becoming increasingly regressive,” says Peter Julian, the NDP’s finance critic. Taking into account all taxes, Julian argues a lower-middle class secretary can now end up paying a higher percentage of income in taxes than her wealthy boss. “I mean that’s an absurd situation.”

CORRECTION: A previous version of this story indicated there were 17 tax brackets in 1948. There were actually 19.

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