What’s all this Hype about Income Inequality?

Income inequality has been a hot topic as of late, but what is the conversation really about and how does Canada fare in this discussion?

Income inequality has found its way into the media spotlight recently because current economic income disparity is higher now than in what is known as the first gilded age, or the income inequality of the roaring 20’s. It is being speculated that just as the 20’s saw a crash and a reform in policy, so too will this current income disparity, or what Armine Yalnizyan has termed the “neo-gilded age.”

It is an indisputable fact that income inequality in North America “is at historic highs” (Stiglitz). While the top 1 percent “takes in about a fifth of the income, and controls more than a third of the wealth,” the remaining 99% are faced with overwhelming obstacles: “those in the middle are faring badly, in every dimension, in security, in income, and in wealth – the wealth of the typical household is back to where it was in the 1990s” (Stiglitz). Ultimately the North American ideals of being a ‘land of opportunity’ and the American dream are just that, dreams. With the ever growing gap segregating the population by economic status, North America has become a land of the least equal opportunity.

The dominant argument against income inequality has rested on a premise of a moral principle of fairness and social justice. More recently, however, acclaimed economist like Joseph Stiglitz have argued that “it is no longer just a moral issue, a question of social justice,” but in fact, “the extremes of [North] American inequality, its nature and origins, are adversely affecting our economy.” 

The obvious economic hindrance is market crashes and financial crises: “as inequality rises, people on the bottom of the income scale tend to borrow more in order to keep up, which, in turn, increases the risk of a major crisis” (Conference Board of Canada). The response to these crises is increased “social and, in turn, political instability, which reduces foreign investment” (Conference Board of Canada) – foreign investment, as you recall from the last blog post, is crucial to the health of a country’s economy.

This type of social unrest was evident in the wake of the 2008 recession when income inequality was thrown into the lime-light by the efforts of the Occupy Wall Street movement that has spanned into a global initiative for change. The U.S., with its history of going ‘soft’ on financial crime and negligence, bailing out bankers while the average citizens lost out, some losing almost everything, was the last straw. But I don’t need to recap all of the tragic events. Everyone knows the plight of the Occupy movement, unless you've been occupying space under a rock for the past few years. That they bring the issue of income inequality to the forefront is indisputable, but what are the major implications of income inequality that they are trying to raise awareness of?

Primarily, aside from equal opportunity, what the Occupy Movement tries to shed some light on is the larger political, and let’s call them patriotic, implications: put more simply, how income inequality hurts democracy, economy, and national identity.  

Hold the Phone Eh! What is this you're saying about Income Disparity?

Before I trudge forward with all of the nasty implications just listed above, let's just get one thing out of the way. Occupy Wall Street may have shed light on American Income Disparity, but don't be fooled if you think that Bay St (the center of Toronto’s Financial District) is that far off. If you think we are all equality friendly Canadians, think again.

Are you ready for this, because this is going to go fast? In his article “The Rise of Canada’s Richest 1%,” Armine Yalnizyan offers a thorough run-down of this disparity in a Canadian context.

Here are the highlights:

Canada’s richest 1% — the 246,000 privileged few whose average income is $405,000 — took almost a third (32%) of all growth in incomes in the fastest growing decade in this generation, 1997 to 2007. The last time the economy grew so fast was in the 1950s and 60s, when the richest 1% of Canadians took only 8% of all income growth.

The richest 1% has seen its share of total income double, the richest 0.1% has seen its share almost triple, and the richest 0.01% has seen its share more than quintuple since the late 1970s.

A recent private sector study shows that by the end of 2009, 3.8% of Canadian households controlled $1.78 trillion dollars of financial wealth, or 67% of the total.

In 2005 household wealth was $4.862 trillion and there were 13.4 million households. If wealth was divided equally, each household would have a financial cushion of $364,300. According to Statistics Canada’s Survey of Financial Security, about 80% of families had less than that to fall back on. In 2005, median wealth (the half-way point in the distribution) was $148,400. The richest 10% held almost 60% of the total wealth in the household sector, leaving the rest of the nation to divvy up the remaining 40%. On average, those in the bottom 20% were standing in a $7,800 debt hole in 2005.

What Are the Causes of Income Inequality?

Contrary to somewhat popular opinion, income disparity is not just based on market forces. Income inequality exists in the face of prosperous markets and suffering markets: “capitalism has been plagued with booms and busts since its origin” (Stiglitz). So to argue that income disparity is owing to poor economic climate is a cop-out, and, as Branko Milanovic points out, the question of income inequality cannot be “taken out of the social arena by evoking ‘the market.’ The market economy is a social construct, created, or rather discovered, to serve people, and thus raising questions about the way it functions is fully legitimate in ever democratic society” (Milanovic).

And on that note of democracy, let’s take a look at how government plays in. According to Stiglitz, income inequality is a result of government policies, or the lack thereof, which “have played a critical role in creating and maintaining these inequities.” As Stiglitz notes, inequality “has increased as a result of ineffective enforcement of competition laws, inadequate financial regulation, deficiency in corporate governance laws, and ‘corporate welfare.’” The cause and effect scenario of income inequality is quite simple to Stiglitz: “[when] competition laws are not enforced, monopolies grow, and with them the income of monopolists. Competition, by contrast, drives profits down.” Competition is the key to more equal opportunity, but it is overwhelmingly difficult to try to compete in a monopolized environment.

Stiglitz outlines three major misconceptions perpetuating income inequality:

1.       Trickle-down economics works (“a rising tide lifts all boats”)

2.       Markets are self-regulating and efficient and any government interference with markets is a mistake.

3.       The cost involved with reducing income inequality would be too great, it would be like killing the goose that lays the golden egg

I've already spoken on the second point, so now I will speak to this first point. This argument presupposes that the rich are the ‘job creators’ and therefore that allowing them to make as much profit as possible will in turn lead to more job creation. It assumes that money flows downstream, but as the rich get richer and the poor stay poor, we know that this simply isn't true. The rising tide does not raise all boats, but instead while some boats rise, others capsize. Having a vast majority of income remain in the hands of the top 1% or even top 10% has proven to be economically unsound.

What is more, many of these wealthy, business savvy proponents did not become wealthy by creating jobs onshore, but by ‘restructuring’, ‘downsizing’, and moving jobs offshore or abroad (Stiglitz). As Stiglitz sees it, traditionally the rich “take their money where the returns are highest.” In other words, they are motivated by capital, not country, and they are often motivated by short-term profit instead of long-term investment. Innovation that does spawn jobs and foreign investment is, as pointed out by Stiglitz, not usually achieved through the efforts of the very rich, but rather “transformative innovations,” have been largely achieved through “government-financed research and development;” in other words the pool of financial liquidity created through taxation that the middle and lower quintile contribute to the most – a thought which I will develop shortly.

Ultimately, this ‘rising tide’ drowns the bottom dwellers while the top float carelessly on calm seas. The rich business savvy venture capitalist is not interested in a bountifully flowing fountain of trickle-down economics, he/she is interested in spanning out his/her reach in all directions to catch every last drop that might fall from any other possible wealth pool, and then, in turn, harboring it away in a self-sustaining reservoir of liquidity.  

I admit that last sentence was a mouthful, but I hope you are following me because we’re about to ask the big question: how do we go about fixing this? And by attempting to answer this question, I can then speak to the last misconception perpetuating the issue at hand – the costs involved with the solutions. 

This Tricky Thing Called Taxes

So, knowing this is all well and good, but how do we go about fixing it? It isn't as simple as redistributing income in a Robin Hood fashion of stealing from the rich and giving to the needed. What a more sensible, legal, and conscientious solution would be is to ensure that “those at the top pay a fair share of their taxes,” and to ensure that “those at the bottom and in the middle get a fair start in life, through access to education, adequate nutrition and health, and not being exposed to the environmental hazards that have come to plague many of our poor neighborhoods” (Stiglitz).

So who’s to say what’s fair in taxing? For this we turn to the numbers, because numbers never lie. At the end of the Second World War, the richest 0.01% of tax filers “paid an average tax rate of 71%. By 2000, the average tax rate of the richest 0.01% stood at 33%,” and between 1990 and 2005 “the richest 1% experienced twice the reduction in taxes as the average Canadian (4% versus 2%). In fact, by 2005 the richest 1% was taxed at a slightly lower rate than the poorest 10% of taxpayers” (Yalnizyan). It doesn't take an acclaimed economist or a highly regarded mathematician to tell you that these numbers just don’t add up.

This is where unequal taxation gives way to income disparity. Ultimately, the very rich are not paying their fair share of taxes because there are “numerous loopholes that favor the rich and the capital gains taxes that are taxed are taxed at less than half the rate of other income” (Stiglitz).

Put clearly, the rich are rewarded for being rich and receive a plethora of reductions and tax exemptions: “reductions in personal income taxes, tax exemptions for savings, and cuts to consumption taxes” (Yalnizyan). The same taxation rules apply to all you say? Well let’s not forget that it is exceptionally much easier to save and receive a savings tax exemption when you have a larger amount of disposable income. For most, their salary just pays their bills and helps them get by and keep their debt manageable, but hardly ever expunging it completely. Thinking that this is merely a problem for the middle and bottom to deal with is short-sighted. This becomes an issue of national economic concern because, as Stiglitz notes, “the engine of our economic growth is the middle class,” and if “those at the middle and bottom have to spend all or almost all of what they get, while those at the top don’t” this in turn “weakens aggregate demand” (Stiglitz).

As Yalnizyan puts it quite simply, “by 2000 Canada’s elite were no longer shouldering as much of the cost of running a nation that rewarded them so handsomely” (Yalnizyan). We see the bottom 47 percent, in contrast, paying large amounts in taxes, which include “payroll taxes, property taxes, exercise taxes, and even part of the corporate income taxes that our major corporations manage to pass on to their customers” (Stiglitz). Even after paying such high taxes all of their lives, our attention is then drawn to “the many older [North] Americans barely above poverty who receive social security payments, for which they contributed through a lifetime of work” (Stiglitz). It seems to be an inescapable prison of just getting by.     

And if this isn't enough to persuade a recalculation of our tax system, there remains a looming tax avoidance scheme that acts as a reverse Robin Hood; it works in the manner of stealing from your nation (and the poorer 99%) to keep it for yourself. Remember when I said the numbers never lie? I lied. Numbers frequently lie, when income is sitting in an offshore bank account and avoids being taxed, that’s an outright lie and is downright disingenuous and harmful to the economy. There is a very real and legal practice of hiding money in “tax havens like the Cayman Islands” (Stiglitz). “That the practice is legal is not an economic justification,” warns Stiglitz, “the loopholes that allow it were put in place by the rich and the bankers, lawyers and lobbyists who serve them so well.” Plain and simple, hiding money in the Cayman Islands (or any tax haven) should not be legal, it is merely a method to hide your money from Uncle Sam and Revenue Canada; regardless of any hallow justifications, this is a way for the top 1% who already have the majority of the country’s income to avoid giving their fair share of that income back. As Stiglitz cheekily reprimands, “we can be sure that the money is not in the Cayman Islands just because it grows in the bright sunshine there.”

So even though it is only one proposed solution to an age-old problem, it is definitely a good one. It won’t be easy to implement without some serious changes in governing policy, but if the rich were paying their fair share, “our deficit would be smaller, and we would be able to invest more in infrastructure, technology and education – investments that would create jobs now and enhance growth in the future […] all three of these are crucial for future growth and increase living standards” (Stiglitz). 

Political Influence: Bills for Ballots

You may be thinking at this point, ‘ok, so I get what you mean by it hurting the economy and people, but how does income inequality hurt democracy and national identity, isn't that a bit of a stretch?’ I, along with many esteemed scholars, will assure you that it is not a stretch. One of the biggest concerns of disparity in income that was particularly brought to light through the recent recession and the 2012 American Presidential election is the sway that the top 1% has over politics and policy: their “big contributions to the presidential and Congressional campaigns are, too often, not charitable contributions. They expect, and have received, high returns from these political investments,” investments which “bought deregulation and a huge bailout” in the 2008 recession (Stiglitz). As Stiglitz eloquently points out, “America is fast becoming a country marked not by justice for all, but by justice for those who can afford it.” The very good example that Stiglitz offers for his claim is that “no banker has been prosecuted, let alone convicted, for banks’ systematic lying to the court regarding the fraudulent practices that played so large a role in the 2008 crisis.” As long as a society’s public policy is determined by an increasing influence of money, that society’s political process is governed by cold hard cash instead of citizens: “our political processes are becoming more like one dollar, one vote than one person, one vote” said Stiglitz about America. In the end, such political investments by the very rich “undermine and corrupt our democracy” and threaten the very “fabric of our society and democracy” (Stiglitz).

Point and case, the top 1% has the financial liquidity to support electoral campaigns and therefore have influence over politics, the same influence that governs the public policy allowing them to skirt their patriotic duties to ‘do their part.’ This perpetuates a vicious cycle “because political inequality leads to economic inequality, which leads in turn to more political inequality” (Stiglitz). For there to be any real chance at bridging the income gap, this cycle needs to be broken. Although there is never going to be a simple solution, better policing and cracking down on tax evasion as well as a reform in tax policy, along with strict policy prohibiting political swaying and more backbone and scruples from politicians are a good place to start. Unfortunately this all requires strength of character, and there is no way to ensure that any of the major players develop that. 

Amanda Labelle

Sources:

"How Canada Performs," The Conference Board of Canada, Web.  http://www.conferenceboard.ca, accessed June 3rd 2014.

Milanovic, Branko. Worlds Apart: Measuring International and Global Inequality. Princeton: Princeton University Press, 2005. Print. 180–81.

Stiglitz, Joseph E. “Some Are More Unequal Than Others,” The New York Times, Oct 26, 2012. Web. http://campaignstops.blogs.nytimes.com/2012/10/26/stiglitz-some-are-more-unequal-than-others/?pagewanted=print. Accessed June 23^rd, 2014.  

Yalnizyan, Armine. “The Rise of Canada’s Richest 1%,” Canadian Centre for Policy Alternatives. Print. 2010.