Canada has an inequality problem. Middle-class incomes have stagnated and poverty has risen as the income share of the top 1% has risen dramatically.
How much inequality we are prepared to tolerate is a matter of political choice. Some countries have done better than others, and Canada has not performed well.
Tuesday is the deadline for filing our personal income tax returns. As millions of Canadians sit at their computers and at their kitchen tables working to remit their paperwork, it’s an appropriate moment to consider how changes to our tax and income transfer system could move us to a more equal Canada.
The Broadbent Institute is presenting proposals Tuesday to the Finance Committee of the House of Commons. Our primary recommendation is that Canada establish as a goal the provision of a basic income-tested guarantee to all citizens through a fairer personal income tax system.
The tax/transfer system equalizes income in two important ways. First, progressive income taxes mean that the affluent pay a higher percentage of income than middle and low income earners. Second, these taxes help finance social programs that benefit those who have middle and low incomes more than the affluent.
Our tax/transfer system is modestly re-distributive, but we still have a very unequal distribution of income after the impact of taxes and transfers has been taken into account. And the re-distributive impact of has been declining since the mid-1990s. It’s now 20% below the advanced industrial country average.
Canada must promote greater tax fairness. First, we should act on the long-standing position of anti-child poverty groups that the maximum level of income-tested child benefits should be raised to cover the full cost of raising children. It is deplorable that one in seven Canadian children live in poverty.
Second, Canada should significantly increase the federal Working Income Tax Benefit (WITB) to deal with the growing reality of low pay and precarious work. Increases to the WITB should be matched by incremental increases in minimum wages to raise incomes and also to ensure that income supplements for the working-poor do not become subsidies to low wage employers.
The biggest gap in Canadian income support programs is for the working poor and near poor. Many Canadians move in and out of low paid jobs but fail to obtain a decent standard of living for very long because they cannot find steady work at decent wages. Contributing to the problem is the rise of temporary and part-time jobs, the decline in union representation and major gaps in our Employment Insurance program. These issues must also be addressed.
Credit should be given to the present federal government for creating the WITB, a new form of benefit that has been shown in the U.S. and elsewhere to reduce poverty while promoting employment. However, the current benefit is extremely modest (less than $1,000 for a single person) and is lost completely at low levels of earnings ($18,000 for a single person). The maximum benefit should be increased significantly and phased out slowly as income rises, so that recipients are always better-off if they find more hours of work.
Third, as a long-term goal, we should abolish welfare as it currently exists. Our current system, paid for by the provinces, provides meagre and stigmatizing benefits that leave recipients well below the poverty line. It also creates a “welfare wall” since recipients lose their benefits almost entirely if they take a low paid and insecure job. A negative income tax has been broadly championed across the political spectrum, including by Senator Hugh Segal and the late Tom Kent, the prime architect of Canada’s social reforms of the 1960s. It should be given serious consideration.
Fourth, improvements to income support programs should be financed by making our income tax system fairer. Even as the income share of the top 1% has risen, their effective income tax rate has fallen, from 39.4% to 33.3% since 2000. We should consider changes to address this, scale back special tax breaks that deliver huge benefits primarily to the very well off, e.g. on capital gains, and crack down on tax cheaters. Corporations should be required to pay to clean up their own pollution. Making these changes would help stabilize government finances and restore public trust in the fairness of the tax system.
These concrete steps should be taken now to make our tax and income transfer system a much more effective vehicle for promoting greater equality.
Last September, the Broadbent Institute issued a major discussion paper Towards a More Equal Canada, which addressed the issue of rising economic inequality. For every $1 increase in national earnings over the past twenty years, more than 30 cents have gone to the top 1% of earners, while 70 cents have had to be shared among the bottom 99%. Middle class incomes have now been stagnant for thirty years.
Income inequality is threatening Canada’s economic growth and is dragging the country’s standard of living down with it, says former NDP leader Ed Broadbent.
Appearing before the Commons finance committee Tuesday, eight experts — including some of the country’s top economists and policy specialists — took turns outlining why income disparity can no longer be ignored.
“There isn’t a sane adult in Canada who is against equal opportunity,” Broadbent told the committee.
“Income inequality is a subject of great concern for Canada, one that threatens to undermine democracy and the common good.”
The solution, he said, is greater tax fairness — higher income taxes and fewer tax exemptions for the country’s top earners, a policy pitch put forth in a 2012 report by The Broadbent Institute, a left-leaning think tank founded by Broadbent.
“Tax cuts have gone to upper income Canadians. We need to increase taxes on the top one per cent,” he told the committee, adding the government should consider restoring past tax levels.
When asked, Broadbent said he did not believe such tax increases would scare the wealthiest into leaving Canada.
“I don’t think they’re going anywhere. They’re not going to pack up and move,” he said.
But professor Stephen Richardson, an executive fellow at the University of Calgary’s School of Public Policy, argues the numbers tell a different story, one that suggests the idea of a growing income gap in Canada is a myth.
“If the rich are getting richer, which may be the case, something else must be at play because the numbers aren’t changing,” he told the committee.
There are two ways of measuring income discrepancy in Canada: through the Gini coefficient and by comparing the wealth of various income groups. The Gini method calculates inequality on a scale from one (total inequality) to zero (exact equality).
In both cases, the gap between Canada’s rich and poor appears to be stagnant. Since 1998, Canada’s Gini coefficient has remained unchanged at 0.43, Richardson said.
Income inequality in Canada, he told the committee, is “a relative concept” and entirely dependent on public perception.
“Canada could have a high level of income inequality and appear more well-off than a country that has lower inequality rates,” Richardson said.
While the numbers may not show direct income inequality, several committee members voiced concerns about unequal access to education, training and employment.
It’s this discrepancy that MPs say could be behind the decline in standards of living — particularly among aboriginal and young people — Canadians say is being felt across the country.
The challenge, said Conservative MP Mark Adler, is that most of the areas in question are provincial responsibilities. While they’re partly funded by transfer payments, he said, the federal government has no way of ensuring the money is spent properly.
Still, said Conservative MP Shelly Glover, the government is working toward improved access to these areas by creating programs like the Canada Jobs Grant, a proposed federal-provincial-industry partnership that would train Canadians in skills in short supply in today’s job market.
When questioned on this initiative, Broadbent admitted that he wasn’t familiar with the proposal but cautioned job training must also be supported by the creation of more unionized jobs.
There’s no doubt that low-income people, especially children and their parents, are better off because of social unionism’s strong tradition in Canada. At all levels,unions take the lead in pressing for public policies such as decent minimum wages, fair labour practices and progressive public services that support families when they are in the labour force and when they are not.