Tax Fairness

                                                      http://occupynatick.org/

The Robert Reich documentary, Inequality For All explains with remarkable clarity what has happened in the United States over the last forty years and in Canada over the last thirty years. Reich argues that the economy will implode unless there is a fairer distribution of income between citizens. That idea is beginning to percolate in Canada. Carol Goar writes:

But continuing to neglect the problem will allow the top 0.01 per cent of the population to skim off an ever larger share of the national income at the expense of everyone else. It will leave most of the electorate with no stake in the country’s collective success. And it will deepen the sense of unfairness hard-working Canadians already feel.

Even banks and business-friendly think-tanks recognize the danger. In a special report last week, the Toronto Dominion Bank urged the government to “lean against income inequality.” A day later, the C.D Howe Institute devoted its annual Benefactors Lecture to rewriting the tax code to restore fairness and give Canada’s next generation a chance.

And, taking his cue from Reich, Kevin Milligan has suggested that several changes need to be made to the way Canadians are taxed:

First, get rid of all the loopholes, starting with the “boutique tax credits” that have proliferated under Prime Minister Stephen Harper. The list includes the children’s fitness tax credit, the green renovation tax credit, the volunteer firefighting tax credit, the public transit tax credit, the tradespersons’ tool tax deduction, the tuition tax credit, university textbook tax credit, the working income tax credit, the video production tax credit and the adult gym membership tax credit and the search-and-rescue tax credit. “These credits are inefficient and they’re biased toward higher earners,” Milligan said.

Second, apply the same tax rate to all forms of investment income: dividends, capital gains and interest payments. Milligan contends this would simplify the system and get badly needed capital into the hands of entrepreneurs and innovators with the potential to go global.

Third — and most controversially — move to a dual income tax system. There would be one flat rate for all forms of capital income, but a more steeply progressive rate structure for employment income. This would include two new tax brackets at the top: one for those with incomes of $250,000 or more (32 per cent), the second for those making $400,000 or more (35 per cent). This, coupled with the closing of tax loopholes, would leave the hyper-rich with fewer ways to escape paying their share of the tax burden.

Goar admits that there are problems with  Milligan's proposals. Most Canadians don't have capital income, so the system would still be tilted in favour of the rich. But Milligan would put an end to the tax cuts that have bought Stephen Harper votes. And the rich would pay more of their fair share.

And, until we stop buying the canard that the rich create jobs, we're heading for disaster.

Inequality Is Not Inevitable

                                                                      http://www.scriptonitedaily.com

Milton Friedman and his disciples worked very hard to transform economics from a social science into a natural science -- which, they claimed, obeys certain ironclad rules. One economist who refused to buy that piffle is Joseph Stiglitz. In last Friday's New York Times he wrote:

If it is not the inexorable laws of economics that have led to America’s great divide, what is it? The straightforward answer: our policies and our politics. People get tired of hearing about Scandinavian success stories, but the fact of the matter is that Sweden, Finland and Norway have all succeeded in having about as much or faster growth in per capita incomes than the United States and with far greater equality.

Ideology and interests combined nefariously. Some drew the wrong lesson from the collapse of the Soviet system. The pendulum swung from much too much government there to much too little here. Corporate interests argued for getting rid of regulations, even when those regulations had done so much to protect and improve our environment, our safety, our health and the economy itself.

But this ideology was hypocritical. The bankers, among the strongest advocates of laissez-faire economics, were only too willing to accept hundreds of billions of dollars from the government in the bailouts that have been a recurring feature of the global economy since the beginning of the Thatcher-Reagan era of “free” markets and deregulation.

Like Pharisees from time immemorial, the movers and shakers lived by the principle, "Don't do as I do, do as I say." And, as their money flooded into the political system, they got the nation's elected representatives to do as they said:

The American political system is overrun by money. Economic inequality translates into political inequality, and political inequality yields increasing economic inequality. In fact, as he recognizes, Mr. Piketty’s argument rests on the ability of wealth-holders to keep their after-tax rate of return high relative to economic growth. How do they do this? By designing the rules of the game to ensure this outcome; that is, through politics.

So corporate welfare increases as we curtail welfare for the poor. Congress maintains subsidies for rich farmers as we cut back on nutritional support for the needy. Drug companies have been given hundreds of billions of dollars as we limit Medicaid benefits. The banks that brought on the global financial crisis got billions while a pittance went to the homeowners and victims of the same banks’ predatory lending practices. This last decision was particularly foolish. There were alternatives to throwing money at the banks and hoping it would circulate through increased lending. We could have helped underwater homeowners and the victims of predatory behavior directly. This would not only have helped the economy, it would have put us on the path to robust recovery.

Canada -- particularly in the last decade -- has followed the same prescription.  Our current prime minister tells us that economics is grounded in certain iron lad rules. One of the basic rules is that inequality is inevitable -- which is, of course, balderdash.

Whose Brain Is Half Full?

Kelly McParland recently nominated the Occupy Movement for The National Post's "brain half full award."  He scornfully described the movement as:

People lying around in tents in downtown parks because somehow that will combat “corporate greed”, or solve one of the two dozen other complaints they had, which essentially boiled down to: “I want the world to be different, but I don’t want to have to put out any effort myself, other than hanging out in this tent.” In the U.S. there was real reason for protest; in Canada it was mainly, “Hey, look what they’re doing in New York. I wanna do that too.”

But reports this morning in The Globe and Mail and The Toronto Star suggest that the  Post's collective brain is half full. Consider the position of Canada's top 100 CEO's:

The 100 highest paid chief executives whose companies are listed on the S&P/TSX composite index made an average of $8.38-million in 2010, according to figures pulled from circulars by the Canadian Centre for Policy Alternatives, a left-leaning think-tank. 

During the same period:

Regular Canadians, on the other hand, have seen their wages stagnate over the past few years. In 2010, after adjusting for inflation, average wages actually fell.

Put another way, on this -- the third day of the year -- the average Canadian CEO has made more money than the average Canadian will make all year. Hugh Mackenzie, the author of the report, says that Canada's business elite and the rest of Canadians are living on two different planets:

“The people at the very top of the income scale — and CEOs are at the top of the top — have really launched themselves into a kind of economic interplanetary travel. If the rest of us are on earth, they're off somewhere else in a different world. I think that's unstable.

And Stephen Harper says that cutting corporate taxes will create more jobs, while .E.I. contributions should be raised. Something's wrong with this picture. Those folks in the tents know what's going on.

The New Normal

Lawrence Martin has an interesting rejoinder to Stephen Harper's claim that -- economically speaking  -- Canada is at the head of the G8 pack. If you look at Canada's economic record from an historical perspective, there is little to applaud:

In an essay in a newly published academic text, University of Dalhousie economist Lars Osberg provides an answer. We stack up dismally. From 1950 into the 1980s, hourly wages grew at a good rate as did living standards. From then on growth has been “pitifully small,” he says.

“For roughly thirty years, the average real hourly wage has hardly changed in Canada and the national unemployment rate has simultaneously been high by Canadian standards. This stagnation of real hourly wages is historically unprecedented.”

Even more interesting is Pierre Trudeau's economic record. Trudeau is the bogeyman of the The Right. His sins are supposedly many. But no transgression was more egregious than his alleged economic illiteracy. However, seen through the prism of today, that record isn't bad:

The conventional wisdom is that the economic record was dismal under the Trudeau government. In the 1970s, western economies suffered through oil price shocks and stagflation and Canada suffered as a result, posting a huge deficit by the time Trudeau left office in 1984. But by comparison to later years the record wasn’t so bad. Living standards grew nicely through Trudeau’s governance and the percentage of Canadians living in poverty dropped from 23 percent in 1968 to 13 percent in 1984.

Since Trudeau left office, living standards have flat lined. Mr. Harper and Mr. Flaherty are cheerleaders for mediocrity. Mediocrity is the new normal.

A Just Society?

The phrase was Pierre Trudeau's, and it caught on. Canadians like to think of themselves as citizens of a Just Society. Certainly, they believe, things are better here than in the United States. But, Carol Goar wrote recently, we have been emulating our southern neighbours. In fact,

Since the mid-1990s, income inequality has been rising faster in Canada than the U.S. They’re still in top spot, but we’re catching up. Our Gini index, which measures income equality, rose by 9 per cent over the last decade. Theirs increased by 4.7 per cent.

And that conclusion is based on old numbers:

It is based on six-year-old statistics. But all of the indicators suggest the trend is accelerating. Since 2005, our tax system has become more regressive, our social services have shrunk, our manufacturing base has deteriorated and we’ve gone through a painful recession that hit the poor hardest.

When Trudeau retired, Canada's tax system became more regressive:

Until 1988, we had 10 income brackets. Then the government of Brian Mulroney “flattened” the tax system, leaving three brackets. It was a welcome change for the rich whose marginal tax rate dropped from 34 per cent to 29 per cent. Everybody else got tax credits to ease the transition. Subsequent prime ministers made the system more regressive by reducing the taxation of capital gains, cutting corporate taxes, offering tax breaks to the wealthy and creating lucrative investment incentives.

And nobody is talking about it. In the last federal election, none of the parties talked about income inequality. They are not talking about it during Ontario's election. It seems to have become a fact of life.

When politicians become courtiers for the wealthy, the poor and the middle class become peons.

This entry is cross posted at The Moderate Voice.

The Refrain Is The Same

Jeffrey Simpson notes that income inequality in Canada is getting worse. According to a Conference Board of Canada report,

The richest group of Canadians, those in the top fifth of income earners, saw their share of national income rise from 1993 to 2008. Within that fortunate group, the biggest gainers were the super rich, the top 1 per cent. And they got even richer not so much from investments but from basic salaries of the kind paid bank presidents and company CEOs.

From 1980 to 2005, the earnings of the top group rose by 16.4 per cent, while middle-income Canadians’ incomes stagnated, and earnings for those in the bottom group slid.

This song is getting tiresome. But, more than that, the data contradicts the conventional wisdom that tax cuts raise all boats. The truth is that they raise all yachts. They certainly do not spur economic growth. Robert Reich has been swimming against the conventional wisdom for some time. Reducing taxes on the wealthy, he writes, merely  causes the economy to stagnate:

The engine of the United States economy is consumer spending, which accounts for 70% of the overall economic activity.  The middle class simply does not have as much to spend on products, which results in less products and services being sold, which leads businesses to lay off more of the middle class due to lack of demand.  This system creates a cycle as the laid off workers have less to spend leading to even less demand.

And this is nothing new. Reich goes back to the 1920's, which were devoted to the same fiscal priorities:

President Calvin Coolidge slashed taxes on the highest income earners. At the same time he pursued anti-union policies that reduced the bargaining leverage of blue-collar workers, resulting in lower wages for them. The only way most Americans could maintain their slice of the pie was to go deeper into debt. Between 1913 and 1928, the ratio of private credit to the total national economy nearly doubled.

The mounting debt could not be sustained. The collapse began with the Great Crash but continued for a dozen years. Why? When debt financing was no longer available to them, Americans could no longer buy nearly as much of the goods and services they were creating in factories and offices. The immediate result was mass layoffs, leaving Americans with even less money. The longer-term result was continued economic depression.

Despite that history, successive American governments have repeated the same fiscal folly. Stephen Harper is devoted to the same failed economic model. He won election telling us that corporate tax cuts created jobs. The data prove that his claim is simply not true. Worse, the repetition of those failed policies is analogous to the patient in the asylum who claims that -- all facts to the contrary -- he is Napoleon.

The House Never Loses

Last week, Hugh MacKenzie -- an economist at the Canadian Centre for Policy Alternatives -- wrote an editorial which relied heavily on recently released data from Statistics Canada. The data underscored what an earlier study (see my post for March 7th) confirmed. The last fifteen years have seen a growing gulf between the richest 5% of Canadians and everybody else. All of this has happened as leaders of all political stripes have sung in chorus that tax cuts create a tide which, in turn, raises all boats.

"It turns out," wrote Mackenzie, "that the share of income among the richest of Canadians is actually concentrated right at the top -- among Canada's richest. Between 1992 and 2004 [the richest 5% of the population carved out] 25.3% of the economic pie." But "more than 90% of the gain in income share among the richest 5% went to the richest 1% of Canadians. And, remarkably, 20% of the gain went to the richest of the rich, the millionaires sitting in the top 0.01% of Canada's income scale."

Writing in The Toronto Star, David Olive put those statistics in context. "Statistics Canada reports that 2.8 million families, or one in five, live below the low income cut off, or LICO, the new politically correct term for poverty line. The gap between rich and poor has reached a three decade high, a prosperity gap usually associated with underdeveloped nations." Referring to Mackenzie's work, Olive pointed out that "a stunning 80% of families have seen their earnings and after tax income stagnate or decline, after inflation, over the past generation."

Such is the hypocrisy of economic and social conservatism. The family values folks have had a disastrous effect on the people they say they revere. Tax cuts led to a decline in social investment, on the theory that the poor, with money in their pockets, would look after themselves. But those tax cuts came in the form of tax credits. And tax credits only apply to those who have incomes. And those with larger incomes receive larger tax breaks.

It has been the same story south of the border, where all of this economic flim-flam began, thanks to Milton Friedman and his colleagues in the Economics Department at the University of Chicago. In his blog last week, Robert Reich -- the former Secretary of Labour and now a professor of public policy at the University of California at Berkeley -- wrote that, according to data supplied by the IRS, "the wealthiest 1% of Americans are earning 21% of all income. . . The bottom 50% of all Americans, when all their incomes are combined together, is earning just 12.8% of the nation's income."

At the same time, Finance Minister Jim Flaherty promised more tax cuts. And President Bush vetoed a bill which would expand health coverage for uninsured children because it would "encourage socialized medicine." As E.J. Dionne pointed out in The Washington Post, by the same logic we should not encourage public education. Today's conventional wisdom is that social investment is socialism. Franklin Roosevelt faced the same criticism. His record speaks for itself.

In the mid 1970's, in the wake of his Nobel Prize, Friedman and his wife wrote a book titled Free to Choose, which PBS turned into a popular series of programs. But, as the last twenty-five years have shown, what Friedman called "freedom," actually meant "privilege." In the name of freedom, economic policy makers have rigged the game. That little white ball keeps coming up on the same few numbers. And it keeps coming up on them again and again.

The Great Divide

A study, with the provocative title The Rich and the Rest of Us, was released last week by the Canadian Centre for Policy Alternatives. It has been generating alot of comment in the nation's media. The study, written by Armine Yalnizyan, is based on an analysis of twenty-eight years of data from Statistics Canada. After massaging the numbers, Yalnizyan reached the following conclusions:

1.Median annual earnings for Canadians in the bottom ten percent of the income scale decreased in inflation adjusted dollars from $3358 in 1976 to $1050 in 2004.

2. Forty percent of Canadians -- those earning $50,000 or less -- are worse off now than in the 1970's, even though they are working longer hours.

3. Canadians earning between $50,000 and $85,000 have seen their inflation adjusted income rise two percent during the last twenty-eight years.

4. The top ten percent of Canadian families -- those earning more than $166,000 a year -- have seen their inflation adjusted earnings rise thirty percent in the last twenty-eight years. And they are putting in five percent less time at work than they did in the 1970's.

Yalnizyan's conclusions were immediately attacked by conservative columnists because they were narrowly focused on Canadian families who were raising children under eighteen years of age. Andrew Coyne, of the National Post, fumed that the study contained, "a great deal of selective emphasis and statistical jiggery pokery." He claimed that while median family incomes "slid sideways" over the last twenty-eight years, they "are nearly 20% higher, after inflation, than they were a decade ago." He also suggested that low incomes in families with children is at least partly attributable to the rise in single parent families -- which have increased from 8% in 1976 to 18% today. One parent -- without a doubt -- brings in less money than two.

Writing in the Globe and Mail, John Ibbitson dismissed thr work of most Canadian think tanks as "a waste of time." Then Ibbitson predicted that "[g]overnments that took this report at its word would increase upper income taxes, raise the minimum wage, bolster union rights and increase subsidies to manufacturers." Such policies, he claimed, would be "an invitation to disaster." After all, they were all tried in the 1970's; and everyone knows that they failed badly then. Or did they?

Conservative thinkers tend to hold governments responsible for the economic woes of the 1970's, forgetting that the Arab Israeli War of 1967 changed world economics much more than the economic prescriptions of Milton Friedman ever did. We are still suffering the effects of that convenient amnesia. Ibbitson ignores completely the oil price shock of the 1970's, when oil went from a dollar and a half a barrel to thirty-four dollars a barrel (see my post for November 20th). Before the formation of OPEC and the price distortions it engendered in world economies, one can argue that the very policies Ibbitson disparages were the kinds of investments in human capital that made Canada one of the most competitive economies in the world. Perhaps the real problem has been our refusal to ween ourselves from what until now has been the lifeblood of western economies -- oil. However that may be, even Ibbitson admits that for the bottom half of Canadians "income levels have been flat for a generation."

And it's that great divide between the top half and the bottom half of the Canadian population that should concern us -- simply because such a divide is not sustainable. It cannot be sustained because those at the top of the pyramid rely on those at the bottom to generate their incomes. The bottom half still consume the goods and services which increase the incomes of the wealthy. Henry Ford recognized this fact when he increased the salaries of his workers to the unheard of sum of five dollars a day, knowing that they were the people who would buy his Model T's.

For, however true Coyne's and Ibbitson's criticisms of economic policies in the 1970's may be, the issue is still how fairly we are dividing the economic pie. It is true that Yalnizyan's study ignores Canadians who do not have, or who have already launched, their children into the world. But she also ignores investment income which, for the most part, accrues to the richest Canadians. As Tom Walkom points out in the Toronto Star, "the richest 20 percent of Canadians own 75 percent of the nation's wealth." Moreover, "we allow the country's 100 top chief executive officers to make, on average, 240 times more than the typical worker (up from 106 times the average wage in 1998)"

The Canadian Centre for Policy Alternatives makes no secret of its left of centre politics. What it does make clear is that governments of all stripes -- Conservative, Liberal and New Democratic -- have been following right of centre policies for a generation. The consequences of those policies are now undeniable. It's time for the pendulum to swing back to the left.