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Using the tax system to offset rising income inequality

| February 1, 2013
Using the tax system to offset rising income inequality

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Congratulations to Statistics Canada for providing an update on top incomes in Canada, and for launching two new CANSIM tables allowing researchers to dig into the details.

While the income share of the top 1 per cent has slipped slightly since the Great Recession -- likely due in large part to the reduced value of exercised stock options -- their share of all income (10.6 per cent in 2010) still stands well above the low of about 7 per cent that was reached in the early 1980s.

As noted by Statscan in their release, the top 1 per cent, who earn at least $201,400, paid 21.2 per cent of all federal and provincial income taxes in 2010.

While this indicates that our income tax system is still fairly progressive, some among the affluent will be quick to argue that they are paying well above their fair share.

But the figures show that the effective tax rate on the very high-income earners has been falling rapidly, especially for the super-rich.

A very large slice (35 per cent) of the incomes of the top 1 per cent goes to the top 0.1 per cent, the elite group that makes up one tax filer in every 1,000. In 2010, the incomes of the top 0.1 per cent began at $685,000 and averaged $1,519,000.

The top 0.1 per cent paid income tax at an average effective rate of 35.4 per cent in 2010. While much higher than the effective tax rate paid by the bottom 99 per cent, that is only slightly higher than the effective income tax rate of 33.3 per cent, which was paid by the top 1 per cent as a whole.

The effective income tax rate paid by the top 0.1 per cent has fallen very sharply, from 41.6 per cent to 35.4 per cent since 2000. This compares to a fall in the effective rate from 39.4 per cent to 33.3 per cent for the top 1 per cent as a whole, and a fall from 18.0 per cent to 14.8 per cent for the bottom 99 per cent.

One has to question why federal and provincial governments have chosen to cut effective top tax rates by so much while the income share of the super-affluent has been rising so rapidly. While the share of taxes paid by the very affluent has more or less matched their rising share of income, the fact remains that the income tax system has done nothing to offset rising income inequality.

Part of the problem is that a significant share of the incomes of the super affluent -- stock options and capital gains -- are taxed at a much lower rate than income from regular wages and salaries.

Another part of the problem is that the top federal tax rate of 29 per cent applies at a relatively low-income threshold of $135,054, well below the income threshold needed to get into the top 1 per cent, let alone the top 0.1 per cent of taxpayers. Of the provinces, only Ontario levies higher tax rates on super-high income earners within the top 1 per cent. By contrast, following the recent deal to avert the "fiscal cliff," the United States now has four tax brackets above a threshold of $146,400 with the rate rising from 28 per cent to a top rate of 39.6 per cent on incomes of over $450,000.

The personal income tax system is only one means to deal with rising income inequality, but it is a doubly effective tool. Revenues from higher tax rates on the super-affluent would blunt income inequality in after tax incomes, and raise needed revenues to fund better social programs and public services.

Andrew Jackson is the Packer Professor of Social Justice at York University and Senior Policy Adviser to the Broadbent Institute. This article was first published in the Globe and Mail.

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