Another squeal from the Ottawa Citizen

My recent paper that found the top 1% of earners actually pay slightly lower tax rates than the bottom 10%, and much less than those in the middle- to upper-middle range, seems to have touched a nerve with my proposal that the rich actually pay more in taxes. For the defenseless and concerned wealthy out there, worry not, because Randall Denley at the Ottawa Citizen has got your back.

The piece has an almost comical air to it, as Denley contorts himself to make it seem like the poor and oppressed of the country are in fact not the poor and oppressed but the most affluent and prosperous. Here’s the blow-by-blow:

Wealthy Canadians face poor treatment at home: Our attitude toward the rich is an unhealthy mix of envy and stupidity, and that has to change

By Randall Denley

Federal Finance Minister Jim Flaherty has been getting so much flak for cavalierly dismissing the money woes of cities that you might have missed his more controversial remark. Six-figure earners are paying too much in taxes, Flaherty said last week, and they should get a break to encourage them to stay in the country.

Tax breaks for the well-to-do will never lead any party’s policy platform, but Flaherty’s on the right track. What this country needs is more rich people, and plenty of them. We all benefit from the disproportionate share of the tax burden they carry and from their potential for philanthropy.

A nation’s rich are its cash cows, and the bigger the herd, the better. And yet in Canada, we like to knock the rich and many hold the opinion that having a lot of money is socially inappropriate. Our attitude toward the rich is an unhealthy mix of envy and stupidity. If we were just a bit more economically literate, we’d celebrate the creation of wealth, not deplore it.

The crass dismissal of arguments that the wealthy should pay more in taxes as “envy and stupidity” is such a classic conservative reaction, and one that totally misses the point. Having blogged recently about my UCC days, I can honestly say I have no pent up desire to have a house in Forest Hill or Shaughnessey; in fact, I would hate it. In more dry academic terms, we know from the growing research on happiness that once a certain income has been achieved, people do not get happier with more money, but do get happier based on the quality of their community, friends, health, education and democratic engagement. But people who are obsessed with money seem to think everyone else is, too.

We complain of the gap between the rich and the poor, and express dismay that some have so much more than others, as if it were unnatural. A recent study by the Canadian Centre for Policy Alternatives argued that the poor have been paying a higher percentage of their income in taxes in the last few years, while the total tax burden of the rich has actually declined. The proposed solution, naturally, was to increase taxes on the rich, not decrease taxes on the poor. This does nothing for the poor, although it would potentially enable government to give them yet more of someone else’s money in an attempt at “equity.”

Say what? Transferring money from the rich to the poor would do something for them, whether as direct income transfers and public services, and it would make for greater equity. It is not like this is without historical precedent. The Nordics do a great job on this front, and the Canada I grew up in did not have the abject poverty we see on the streets today.

If you want to talk about inequity, consider this: The top five per cent of tax-filing families earned 25 per cent of the country’s taxable income and paid 36 per cent of the income taxes in 2004, according to Statistics Canada. Yes, that’s five per cent of the population bearing more than one-third of the total income tax burden. Imagine what taxes for the rest of us would be like without these people.

I went back to my dataset on this last point and here is what I find: the top 5% accounted for 26% of broad income (including capital gains, inheritances and employer-provided benefits), which is quite close to the number cited for “taxable income” (an amount that would be net of deductions for RRSPs and such). But the top 5% paid only 24% of TOTAL taxes. It may be that the top 5% pay 36% of INCOME taxes (in my dataset for 2005, it is only 32% for federal and provincial personal income tax), but as my study pointed out there is more to the tax system than income taxes (the only consistently progressive part of the system) and it is precisely those other taxes that weaken the progressivity of the tax system as a whole.

And yet, it wouldn’t be fair to call those big income tax contributors rich. To get into the top five per cent a Canadian family had to have an income of at least $154,000 in 2004. A couple of high school teachers would be close to that mark. For an individual, an income of $89,000 put her in the top five per cent of Canadian tax filers. That’s certainly decent pay, but it’s a far cry from being rich. The fact that the other 95 per cent of tax filers earn less tells you a lot about what a mediocre economy we actually have.

In the study, I do not call the top 5% rich; I tried to avoid such terms altogether. If you search the study for the term “rich” you get one hit and it says “The tax rates of the richest 1% of Canadians have dropped dramatically since 1990, while poorer Canadians have seen their tax rates rise steadily.” So Randall is getting himself worked up over a strawman of his own creation, apparently without having even read my study.

That said, the top 1% in 2005 had family incomes in excess of $265 K so I think it is fair to call them “rich”.

In the U.S., the average income for the top five per cent of families was 40 per cent higher than it was here, Statistics Canada says. Even our very rich aren’t so rich compared to the upper level of American earners. The top 0.01 per cent of tax filers there earned $25.8 million, more than three times the Canadian amount.

With that extra income comes an enhanced ability to give. If you look at a project like Ottawa’s proposed concert hall, you quickly realize that we’re desperately short of rich people, especially in a government town like Ottawa where most top earners are salaried workers. This city-enhancing project would be much closer to reality if a wealthy arts lover were to come up with a $1-million contribution sometime soon.

Ottawa’s fundraising professionals recently distributed their annual philanthropy awards. Not all the winners were rich, but it takes some serious cash to donate $2 million to build a children’s kindergarten and a family outreach centre in Namibia. Donald and Shirley Green of Brockville were honoured for that act of generosity. We need more people like them.

Last week, the founders of Research in Motion announced that they were giving $150 million in stock to various causes. The wealth that comes from success enables individuals to have a great positive impact.

To wit: rather than tax the wealthiest individuals, and spending the proceeds on things that are going to make life better for the rest of us, we should be giving the wealthy tax breaks because some of those tax breaks will be donated back to the community to the causes that matter to those wealthy individuals. We should be more like the US and have more grotesquely wealthy people at the top of the distribution. Hey, this oped needs a laugh track!

It also needs to be said that the rich in Canada are rich precisely because they live in a country like Canada. As payback, they should contribute through their taxes to ensuring those conditions exist for all Canadians not just those lucky enough to inherit a trust fund. The oped ends:

In Canada, our inclination is to appropriate that wealth in the form of taxes. At the heart of all this is our very Canadian belief that government can and will do more good with our money than we will ourselves — and that, despite the rather large handling charges involved in collecting a tax and passing the money through a bureaucracy and then out the other end to the ultimate recipient.

Any tax scheme we have in this country will always ensure that our top earners bear a disproportionate share of the total tax take. A small cut would be a step towards fairness, but even more important would be the underlying message: earning a lot of money is something good, not something bad.

By the end of the article, Denley seems to have completely lost the plot. My point was that the tax system by 2005 now failed the test of vertical equity, the ability-to-pay principle of tax economics, as the richest were actually paying less than everyone else once all income and taxes were considered. Denley incomprehensibly argues that fairness would instead mean a tax cut for the rich, as a reward for, um, getting rich. And furthermore, he argues that a tax cut would spur them to do more to be even richer (how is not clear; this is a Laffer curve argument), and some of that supposed new wealth would trickle back to the rest of us in the form of donations to charitable causes. And finally, opposing such measures constitutes envy and stupidity.

Interestingly, there is a different point of view on this from the very wealthy in the US whom Denley so adores. I just wrote an oped that leads:

Earlier this year, Warren Buffett, one of the richest people on the planet, remarked that his secretary, who makes a lot less money than her boss, actually pays a higher rate of tax. Buffett went so far as to call on the US Congress to stop giving major tax breaks to rich people like him.

It would be easy to dismiss this as just another example of the follies of the Bush administration. But a closer look at tax rates in Canada reveals a strikingly similar story. …