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Can capitalism be responsible?

Inequality and fairness, it seems, will be a major theme in the U.S. presidential election campaign this year.
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Inequality and fairness, it seems, will be a major theme in the U.S. presidential election campaign this year.

In Britain, the coalition government and the Labour opposition are debating “responsible capitalism” and growing inequality.

We need to have a similar debate in Canada.

It is noteworthy that capitalism’s elites, gathered at the World Economic Forum in Davos, Switzerland, also focused much of their debate on inequality and the threat it poses to social stability. The Occupy movement in New York and London is one symptom. The U.S. Tea Party is another.

More people are see tax laws as benefiting the wealthy while stock options, bonuses and super pension plans for top executives are boosting bosses’ incomes at a time when inflation-adjusted wages for many have shown no growth for a decade and new employees in a growing number of industries are expected to accept much lower pay and benefits than existing workers.

A new study — Divided We Stand: Why Inequality Keeps Rising — documents the increase in inequality in Canada, and the erosion of tax and support policies to offset the growing gap in market incomes. Of 29 nations studied, Canada had the seventh highest level of inequality. This was due both to a growing gap in earnings between high and low-paid workers but as well to less redistribution.

The report, from the Organization for Economic Co-operation and Development, shows that the richest one per cent of Canadians saw their share of total income grow, from 8.1 per cent in 1980 to 13.3 per cent in 2007, while the share of the riches 0.1 per cent more than doubled, from two per cent to 5.3 per cent.

The average income of the top 10 per cent of Canadians in 2008 was $103,500, which was 10 times higher than the bottom 10 per cent, with an average income of $10,260. In the early 1990s the top 10 per cent had incomes eight times higher than the bottom 10 per cent.

One reason is that tax cuts in recent years have benefited mainly those with higher incomes. Between 1981 and 2010, the top federal marginal income tax rate fell from 43 per cent to 29 per cent. At the same time, the Harper government’s decision to cut the GST by two percentage points also benefited disproportionately those with the highest incomes since they can afford to buy more expensive cars and other products. Canadians on low incomes spend most of their incomes on rent and food, which are GST-exempt.

For a long time, Canada has relied on a mix of taxes and transfers that benefit Canadians on lower incomes, such as the guaranteed income supplement for seniors or more recently from tax measures such as the Child Tax Benefit and the modest working income tax benefit to reduce the inequality in market incomes — wages and salaries, capital gains, dividend and interest income.

But as the OECD reports, Canada has become less generous.

“Prior to the mid-1990s, the Canadian tax-benefit system was as effective as those in the Nordic countries in stabilizing inequality, offsets more than 70 per cent of the rise in market income inequality,” it says. But “the effect of redistribution has declined since then: taxes and benefits only offset less than 40 per cent of the rise in inequality.”

Other factors were also at play. For example, there has been a rise in self-employment, with the self-employed earning less than full-time workers. This, the OECD said, explained more than a quarter of the increase in inequality in Canada. A growing number of Canadians are being forced to work as contract employees, rather than regular workers. Other Canadians find they can only gain part-time jobs so have fewer hours of work.

The best solution to rising inequality is employment and, as the OECD says, “the biggest challenge is creating more and better jobs that offer good career prospects and a real chance for people to escape poverty.”

How to do that is another question. Investing in education and skills is key. Health care and family care are also important. Minimum wages matter. Improved tax and benefit policies are also important. And, the OECD says, if a growing portion of the country’s income is going to the top, this group has more capacity to pay taxes to enable a fairer society. If we want a fair society with a decent life for all, then rising inequality should be a big concern.

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