Are the Wealthy Over-Taxed or Do They Pay Too Much?

I have read quite a bit lately about how unfair our income tax system is to those who earn incomes in the top 20% of the population. Those postings and articles tend to be written by people with incomes in or close to the top 20% bracket (though my view of those authors is admittedly my bias more than proven truth). But I bet you a dollar I am more right than wrong this time.

That parenthetic addition is a key problem. We tend to place more emphasis on our biases and our context, and then use data selectively to confirm them. We often ignore data and trends because, basically, we don’t want to believe them. Climate change is a perfect example. Populist movements are based in part on addressing the biases of their supporters, such as immigrants take away jobs from the :”rest of us”  or that people who are living in poverty are lazy or somehow personally corrupt. Folks lament the benefits afforded to Indigenous people but would never call being compensated for their land, much less their way of a life, as a “benefit.”

If you believe you and your income cohort are paying income taxes that are a burden to you and folks like you, you will likely point to data that proves your point. For example, citing the marginal tax rate of 50% for high income is factual, but does not mean these earners are actually writing a cheque for half of their total income to the government.

As per the Financial Post, “According to Statistics Canada data, in 2013 the top 10 per cent earned 35 per cent of Canada’s total income yet paid 54 per cent of federal and provincial income taxes.” Is that unfair? Does it hurt the economy? Maybe, but for sure we need to look at more data than just accept a conclusion from a wealth-oriented publication based on a sentence.

What does “total income” mean? Gross or net? My assumption is the later, but I could be wrong. We have a progressive income tax system that increases the marginal tax rate so that those with more pay  more. But we also have a tax system that provides those who make more with more “real” opportunity to reduce taxes (which in my simple mind is about reducing the gross to the lowest possible net). There is a substantial industry that caters to the wealthy focused on growing wealth and reducing taxes.  The Star wrote about “Canada’s ‘Filthy Five’ tax loopholes.” The title certainly reflects a bias, doesn’t it? It’s polemic and polarizing from the get-go.

So, ignoring the histrionics, these loop holes, rightly or wrongly, decrease the income taxes paid by the wealthy. You can assess them for yourself here. Bottom line is that it is unlikely that someone making $200,000  or $400,000, or more per year is handing over half their total income to the tax coffers. Loop holes exist for everyone (if indeed “loop holes” is the correct term to use), but are deployed by those with means to deploy them.

I am not condemning this practice of reducing income taxes, and I do agree that even if the wealthy don’t actually pay the marginal tax rate, they are paying more tax percentage-wise and in actual cash than a worker making $15.00 per hour or a family of five making $45,000 per year, but I have a hard time basing a claim for unfairness on one piece of data, especially when other data – like the growing income and wealth gap between the wealthy and everyone else.

Consider the following charts for Edmonton as provided by the Edmonton Social Planning Council in its 2018 Tracking the Trends Report.

While all cohorts have gained in wealth except the lowest cohort which basically has remained flat, if that, the top cohort has seen gains on average of approximately 177% ; the second highest cohort has gained about 102%. The middle cohort has seen an increase in wealth of 43% while the second lowest cohort has see a gain of 125% which is  good sign for that cohort, at least in Edmonton.

That said, as the Edmonton Social Planning Council points out, “In 2016, the top quintile (fifth) of Canadians had a median net worth of $1,034,000 compared to the bottom quintile of Canadians which had a net worth of just $11,000. The former has seen a gain of approximately $600,000 while the lowest cohort has seen no gain at all.

There is an argument to be made that the chart suggests an equitable concentration of wealth in terms of percentage growth, although the gains in actual wealth favor the wealthy. But I surmise that an economy that equitably benefits everyone is not the case for 20% of the population.

This local chart provides another view – and perhaps a biased view of the income gap.

The chart would tell us more if it matched the quintile approach in the previous chart, but it does indicate a trend that, while seeming to be unfair (whatever “unfair” means), and it does raise questions about the viability of an economy with this pattern of income growth.

How do these trends link into a view point that the wealthy are unfairly taxed or that they should pay more than they do? These seem to be small questions in the big picture of what is happening to us as a nation economically.

Such questions and those like them pertaining to other issues or concerns tend to polarize us, create encampments, rather than muster a collective effort to genuinely make things better for all of us. Viewing  the poor as a tax burden on people with means spawns stereotypes and images that further polarize us as in the cartoons to the right.

If you wish to explore Wealth Inequality in Canada and how people’s perceptions are of what wealth distribution looks and should be compared to what it actually is, here is a video that may be helpful.

This tendency to use small sets of data to reach positions and proposals that favor “me” and those like me also exists at the other end of the spectrum.

There are tax benefits that benefit those earning far lower incomes than the top 20%. The Canada Child Tax Benefit has or will, according to the Federal Government, lift 300,000 families out of poverty. The less the family makes the more they get.

This article runs a few scenarios about the tax impacts of the Child Tax Benefit and other provincial tax benefits and is worth a read to understand the data.

One of the scenarios the author chose (likely a biased choice) was two working parents (with three children) earning a total of $45,300 and a tax payment required of approximately $4,500. But as the author rightly points out, in effect these tax benefits wipe out that tax payment and inject another $14,750 into the families overall income. Other tax payers are paying for that, it’s true.

Is this fair? If one’s thinking ins confined to income taxes, then I can understand why folks might say this is not fair to them, but there really is more to consider, isn’t there?

For example, the wealthy might claim their wealth creates jobs. More wealth, more jobs, right? Sure, that’s true but not necessarily universally true. If the jobs pay so poorly people can’t make ends meet and that have no benefits, and exist in precarious workplaces (which is a growing trend), that doesn’t really sound like a benefit. A few will say those folks should consider themselves lucky to have a job, the inference to be made being stop whining. Such comments are mean-spirited and actually devalue human beings, but more than that such statements are facile rationale for “keeping more of what’s mine, the rest of you be damned.”

It’s as facile and mean-spirited as claiming wealthy people are greedy, uncaring people who should consider themselves lucky to have the income to qualify for the highest marginal tax rates.

Do the wealthy consume more and fuel the economy and contribute more in sales taxes? Sure, but to a point. Whereas a family earning $45,000 will likely spend nearly all of their income on housing, food, clothing and other more basic expenses (which does fuel the economy, right?), it seems unlikely that someone making $450,000 is spending all of their money in the market place.

It would be telling to understand if 10 of those families do more for the economy than one person making the same amount as the ten.

One could argue that the injection of cash into that family’s bank account from tax benefits is good for the economy overall. It’s not likely that such a family is putting much away for retirement or savings or for trips overseas or a cottage.

There are problems with the Child Tax Benefit, at least from my perspective. For example, another scenario in the article goes like this for the same family make-up.

“A household at the very top of this group, the 40th percentile, or $80,844 of income, should pay $11,690 in income taxes (again, assuming no deductions), and would receive $10,282.44 in tax-free benefits. It effectively pays $1,408 in tax.”

This family will be benefit more than the $45,000 per year family, and that seems unfair, doesn’t it? Maybe, maybe not. But it does beg the question about whether or not the income thresholds for receiving the Child Tax Benefit should be lower than they are. The way it stand now is also reflective of a mindset and practice that suggests the more you have, the more you should benefit.

In many communities, the advent of the CTB has resulted in lowering the living wage benchmark, which suggests that a living wage is not really connected to the worth of a position but is more akin to being an income supplement for the poor. So, the living wage gets lowered but if, for example, two parents work in that community making $80,000 per year in total as per the example above, I am pretty sure their wages will not be lowered even though that family is receiving the same benefit – and significantly so. Is that unfair?

This tendency to view data simplistically and narrowly is pervasive and perhaps unavoidable given the time and energy it takes to be “fully” informed and consequently prepared to change one’s mind about all that is really going on.

I have no doubt that my writing is connected to the biases I hold, but I should also be working hard to go beyond biases and unfounded or incomplete opinions. I think I try to do that, but I am sure I often fall short of the mark.

Simplistic use of data results in simple conclusions like “the rich don’t pay enough taxes” or “the rich pay too much in taxes” It gives rise to unworkable and untenable political platforms like the Federal NDP’s intention to increase taxes to the wealthy as pointed out recently in a Face Book post by colleague, Carman McNary or policy decisions that in effect cut services to public services or decrease funding of programs focused on helping the marginalized,  in order to prop up an industry.

I don’t have the answers but I do believe we can co-create them and that begins with a more comprehensive embrace of data and trends and a commitment to some core principles. One of those principles is, for me, that the economy should work equitably for the majority, I don’t think that’s true, yet. Do you?

Sources and Other Reading

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