Survey understates income gap

Despite its flaws, the National Household Survey raises important questions about income inequality in Canada, as well as underscoring the great gap between those at the top and those further down the income ladder.

Despite its flaws, the National Household Survey raises important questions about income inequality in Canada, as well as underscoring the great gap between those at the top and those further down the income ladder.

To be in the top on per cent of income earners, an individual would have to have income — salary and other employment income, investment income and government transfers — in excess of $191,000 in 2011, when the survey was conducted, and to be in the top five per cent they would have to have income in excess of $102,300.

As Statistics Canada reported, the average income of Canadians in the top one per cent was $381,300 and in the top five per cent $179,800.

These numbers almost certainly understate the gap.

They are based on voluntary, not mandatory, disclosure. They do not include capital gains, a major source of income for high-income Canadians.

They do not measures differences in wealth — the ownership of homes, stocks and bonds, other real estate or other assets. But ownership of assets yields dividends and interest, and in 2011 almost 57 per cent of investment income was earned by Canadians in the top 10 per cent.

Nor do they take into account unrealized stock options and deferred income that is commonplace for top executives.

Concern over income inequality tends to be much more focused on two groups — top executives with multimillion-dollar salaries, stock options worth millions more, deferred income and generous pension plans, and on what might be called the plutocracy, those with very high levels of net worth, and these are not apparent in the National Household Survey.

Other research by Statistics Canada shows that the top one per cent of tax filers between 1982 and 2010 increased their share of total income by 4.3 percentage points and accounted for the biggest growth in inequality.

The middle class saw their share of national income decline while those at the very bottom saw minuscule gains.

Statistics Canada also found that between 1984 and 2005, the share of total wealth owned by the top 10 per cent of Canadian families grew from 51.8 per cent to 58.2 per cent.

Tax policy under both the Liberals and Conservatives has helped widen inequality so this is an issue that needs to be carefully examined.

When Prime Minister Jean Chretien came to office, 75 per cent of capital gains were subject to the capital gains tax and taxed as income at the top marginal rate of each taxpayer.

The Chretien government lowered taxable capital gains tax to 50 per cent of the gain and lowered marginal tax rates as well, a benefit that mainly went to high-income Canadians.

The Harper government then lowered the GST by two percentage points, which made a major dent in federal tax revenues but also disproportionately enriched top income earners who were more likely to gain savings when they purchased high-end automobiles, furniture or clothing, for example.

One way that governments can address income inequality from the volatility of free market capitalism and the “creative destruction” from major new technologies is through social programs. Yet tax policy has weakened the ability of governments to provide social programs.

But a bigger question is why has inequality grown?

Technology — the information and communications technology revolution — has eliminated many middle class jobs. Globalization has enabled companies to shift production to lower-cost regimes or to significantly squeeze wages and benefits by threatening to relocate activities elsewhere.

There is another cause that’s important — the insistence that the only function of a corporation is to maximize shareholder value.

This has shifted focus to boosting the price of a company’s share and this has been achieved by severe cost-cutting — including jobs, pay and benefits — and a focus on short-term earnings results rather than longer-term value creation.

It meant a major escalation in executive pay and generous stock options while jobs and pay for most were being frozen or cutback.

There will always be inequality, and that is a necessary feature of an innovative economy where change and productivity raise overall well-being.

But at the same time, a sustainable society is one where wealth creation is widely shared. Yet our society is becoming too polarized, with a small minority reaping huge gains while the majority face stagnation.

We need a serious look at the growing divide between those at the top and everyone else and the implications of this for long-term social progress.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.