Why the rich don’t want to talk about inequality, and why the 99% do
Everything you need to know about why the rich don’t want to talk about inequality, and why the 99% do, is right here in this chart.
The average income of those in the top 1% in Canada has about doubled since 1982, and for the top 0.1% it has increased by about two and a half to three-fold. But over this period the fraction of their income paid in taxes, their average tax rate, has remained about the same, and even a little lower.
During the early to mid 1980s the average income of the 99% was about $33,500 (measured in 2010 dollars), and by 2010 had risen to $37,200, amounting to about a 10% increase or a bit more.
Members of the top 1% were making about $260,000 to about $270,00 on average, but this ballooned, reaching a peak of $585,000 in 2007, and even after falling to $488,600 in 2010 was 1.8 times higher than in 1982. The changes for the top one-tenth of one percent are even more dramatic: their average income started at $777,940 and by 2007 had tripled to reach $2,344,210.
As a result top earners contribute a higher share of all the taxes paid by Canadians, and this has risen: the top 1% contributed about 13% of all taxes paid to federal, provincial and territorial governments during the 1980s, and 20 to 23% during the 2000s.
But in spite of these changes the average tax rate of all three of these groups, total taxes paid divided by total income, was pretty well the same over these almost three decades. In the early to mid 1980s top earners were paying about 30% of their income in taxes, three decades later about 30% or even a bit less.
Does the fact that the top 1% who make about 10% of all income but contribute 20% of taxes imply, in the words of an editorial in a major Canadian newspaper, that “They are a net benefit to Canada. Occupy that.” ?
Or does the fact there has been no change in the fraction of their income going to taxes, even though incomes have doubled and even tripled, indicate just the opposite: that they should be paying more?
Alfred Marshall in his Principles of Economics, the most used economics textbook from the 1890s to the 1920s, not just in Cambridge England where he taught, but in the whole English-speaking world, wrote that:
A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind.
In other words, losing a dollar when you already have many causes less pain than when you have only a few. Marshall’s argument is the basis for both the substance and the method of a good deal of basic micro-economics: it explains the “law of demand”—why lower prices induce people to buy more—but also why tax rates should rise with income.
Economists judge the functioning of the tax system in a number of ways: certainly the system should not be administratively cumbersome, and it should, to the greatest degree possible, not cause individuals in a well-functioning market to change their behaviour. It should also treat equals equally. Finally, the tax system should raise more revenue where it will cause the least pain. And this last concern, when coupled with Marshall’s reasoning, suggests that tax rates should be progressive: as income increases, the greater the fraction that should be paid in taxes.
And this simple lesson from an economics textbook written a hundred years ago is one reason why the rich don’t want to talk about inequality, and the 99% do.
[ You can review the structure of tax rates at the federal and provincial/territorial level in Canada on the web site of the Canada Revenue Agency. Every dollar of income earned above $135,054 is taxed at a rate of 29%, while at lower income levels the rates vary from 15 to 22 to 26%. The top rates vary across the provinces, with the exception of Alberta, which taxes income at a flat rate of 10%.
To make it into the top 1% in 2010 required an income of $215,800, well above the threshold for the top federal tax rate to kick in.
Here is a spreadsheet of information on Average incomes and taxes I have drawn from the Statistics Canada website on the income shares of tax filers, which was first discussed in a January 28th, 2013 press release. I have expressed some of the information in 2010 dollars to facilitate comparisons over time, and used a measure called “Total Income with Capital Gains”. ]