Canada's Shortage of Rich People
Later this fall, a group of MPs will gather on Parliament Hill to revisit one of Canada's most intractable issues - the plight of the poor. The hearings by the human resources and social development committee, held at the request of the NDP, are still months away, but here's a not-so-bold prediction of what you'll hear: the rich are getting richer while the poor get poorer.
It's a popular theme these days. TV ads from the NDP about the "prosperity gap" show opulent mansions juxtaposed against images of panhandlers and struggling single moms. In March the Toronto Star, as part of its War on Poverty series of articles, said those at the top are "soaking up the rewards" while everyone else is treading water "just to stay alive." Meanwhile, a report called "The Rich and the Rest of Us" from the Canadian Centre for Policy Alternatives in March went so far as to draw a link between the soaring fortunes of the rich and the threat from climate change, arguing both trends are unsustainable and must be reversed. The bright idea gaining traction among those who want to see Canadian incomes become more level is to hike taxes on the rich.
There appears to be ample support for such a move. A poll conducted last November by Environics Research found 70 per cent of Canadians favour stiffer taxes on the wealthy as a way to pay for social programs. Yet a closer look at the historical data on incomes and taxes throws into question many of the entrenched beliefs about inequality in Canada, say economists and tax experts. The truth is the rich get a raw deal at the hands of the taxman, and our antipathy toward the wealthy is totally misguided.
It's not just that the mind-boggling fortunes of the Thomsons, Schwartzes and Desmaraises of this country have nothing to do with the root causes of POVERTY, which has actually been on the decline over the last decade. Canada's most affluent citizens already pay the majority of the nation's tax bill, and our reliance on revenue from the wealthiest citizens is growing. If anything, the gap that Canadians should be worried about is the one at the top. Simply put, Canada is in dire need of more rich folk, not less, and this country risks losing out as globalization makes it ever easier for the monied class to pick up and leave. "They're carrying the hundred-ton weight already," says William Watson, a professor of economics at McGill University. "We have a small portion of taxpayers paying a high percentage of overall taxes, and I don't think that's fair."
On the surface, those seeking evidence of income disparity are easily rewarded. One report from Statistics Canada in 2005 found that between 1990 and 2002 the only group of Canadians who saw their share of income increase were those at the very top. The wealthiest 10 per cent of tax filers earned 35.7 per cent of the total income at the end of that period, up from 31.7 per cent at the beginning. Over the long run, that gap seems to have exploded. As the Centre for Policy Alternatives points out, in 1976 the richest families with children earned 31.2 times as much as their poorest counterparts that year. By 2004, that ratio had rocketed to 81.6 times.
To many, this yawning gap is the clarion call to spur Ottawa to action. Yet the actual gap is nothing like those figures suggest, since they represent gross, pre-tax income. Factor taxes into the equation and the numbers look dramatically different. Between 1976 and 2004, the after-tax income gap between the richest and poorest families barely budged from 8.1 to 9.9, proving Canada has nearly perfected its Robin Hood routine.
In many ways, such relative measures of rich and poor are meaningless anyway, say observers. "This is not a zero-sum game," says James Milway, of the Institute for Competitiveness & Prosperity at the University of Toronto. "Just because Bill Gates is a gazillionaire, doesn't mean that some single mother is poorer." In absolute terms, all Canadian income groups are better off today than they were a decade ago, thanks largely to the red-hot economy. Between 1996 and 2005, the top one-fifth of earners saw their after-tax income rise 24 per cent, while the rest of Canadians clocked a gain of between 17 and 18 per cent, according to StatsCan. That's helped lift many Canadians out of poverty. In 2005, roughly 10.8 percent were living below StatsCan's poverty threshold, down from 15.7 percent in 1996.
To be sure, poverty is still a real problem, especially among children and recent immigrants, and it cries out for action. But to lay the blame at the feet of the rich is a dubious claim. Compared to many other countries, Canada's rich already dig deeper into their pockets come tax time. Those in the highest tax bracket fork over anywhere from 39 per cent of their annual income in Alberta to 46.4 per cent in Ontario and as high as 48.2 per cent in Quebec. By comparison, some state and federal taxes in the U.S. top out at around 37 per cent.
Nor does it take much to be rich in Canada. The top tax rate applies to anyone who earns about $70,000 or more. By comparison, the highest marginal rate in the U.S. doesn't kick in until you're pulling down more than US$350,000.
Add it all up, and the wealthy in Canada are carrying a disproportionate chunk of the tax bill. According to StatsCan, in 2002 the top 10 per cent of taxpayers paid 52.6 per cent of all federal taxes, up from 46 per cent in 1990, making them the only group whose share of taxes exceed their share of income. At the same time, the rest of Canadians have seen their collective tax bill shrink.
For many Canadians, all this talk of the affluent shouldering the tax burden still adds up to a big, fat "so what?" The wealthy don't exactly need our pity. No, but we as a country desperately need the wealthy, and in Canada we've long been running a rich deficit. "The really striking thing about the rich in Canada is how few of them there are," says Finn Poschmann, a senior policy analyst at the C.D. Howe Institute. It's been a quarter-century since former Conservative finance minister Michael Wilson pronounced Canada suffered from an "acute shortage of rich people." Little has changed. According to the most recent World Wealth Report by CapGemini and Merrill Lynch, Canada has 232,000 high-net-worth individuals with assets greater than US$1 million (excluding primary real estate), just eight per cent of the number of millionaires south of the border. And if you make more than $190,000 here, you're among the richest one per cent. Compare that to the U.S., where it takes an estimated US$400,000 to join the elite club.
It's not just the tax revenue Canada potentially forgoes by not having more wealthy citizens. The rich are major donors to charitable causes. The wealthy are also far more likely to play the role of angel investors to new start-up companies, providing a critical support to both the domestic economy and industrial innovation. And a report in December from TD Economics entitled "Lifestyles of the Rich and Unequal" found nearly one-third of those in the top 10 per cent of income earners are business owners - and hence, employers. "Having fabulously wealthy people," says Milway, "is not a bad thing."
Which is exactly the notion a growing number of countries in Europe have twigged to. Old-guard nations like Sweden and France have grown tired of losing their upper crust to more tax-competitive jurisdictions. By some estimates, hundreds of thousands of wealthy French have shifted their assets out of the country, many to London, which the Daily Telegraph recently dubbed the seventh-biggest French city in the world. Meanwhile Sweden, famous for its plush social programs and correspondingly high taxes, recently axed its wealth tax. Yet eastern European nations are keeping the pressure on with lower and lower personal income tax regimes. "Globalization has been a great friend to taxpayers because it is now so easy for labour and capital to cross national borders," says Dan Mitchell, a senior fellow at the Cato Institute in Washington. "Politicians are afraid the geese that laid the golden eggs are flying away."
We've already seen that in Canada. Auto magnate Frank Stronach is a resident of Switzerland, while billionaire Michael DeGroote lives out his retirement in Bermuda. And artists like Shania Twain and Quebec songwriter Luc Plamondon have joined the rush of international stars fleeing to lower tax jurisdictions. Their moves have angered some. Last month, when Plamondon was awarded the Order of Canada, NDP MP Pat Martin blasted the singer for his 1999 decision to flee to Ireland and then Switzerland. "I call it economic treason to be a tax fugitive," he said.
Martin's comments came on the heels of a private member's bill tabled by his colleague, NDP MP Chris Charlton, to make it harder for companies to pay top executives more than $1 million a year. The bill isn't likely to go anywhere, but observers see it as indicative of the undercurrent of resentment against the rich in Canada.
Here's something else to get critics of the rich hot under the collar. In the time it's taken to read this article, Canada's wealthiest will have added millions of dollars more to their ever expanding fortunes. But that doesn't mean the rest of us are necessarily any poorer. In fact the data shows a big chunk of that money will find its way into government coffers. It's worth remembering that when the politicians come out of their meetings in a few months and point the finger at the rich.
Maclean's June 18, 2007